The Spatial Solow Model with Capital and Labor Diffusion

Spatial economics has become a prominent part of economic sciences over the past decades. One of its goals is to explain the flow and distribution of production factors in space. One possible way to do that is by employing theoretical economic models, such as the Solow model. This article aims to analyze the impact of including a labor diffusion term in the capital equation upon the steady state stability of the spatial Solow model, thereby bridging a gap in the literature. The results indicate that the diffusion coefficient has a profound effect on stability. Namely, high values of the coefficient can make the model unstable, but only if labor reacts to the density of capital.