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Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting

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  • Richard E. Baldwin
  • Toshihiro Okubo

Abstract

A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple new economic geography model to show that the standard assumption of identical firms is neither necessary nor innocuous. We show that relocating to the big region is most attractive for the most productive firms; this implies interesting results for empirical work and policy analysis. A `selection effect' means standard empirical measures overestimate agglomeration economies. A `sorting effect' means that a regional policy induces the highest productivity firms to move to the core and the lowest productivity firms to the periphery. We also show that heterogeneity dampens the home market effect. Copyright 2006, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Journal of Economic Geography.

Volume (Year): 6 (2006)
Issue (Month): 3 (June)
Pages: 323-346

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Handle: RePEc:oup:jecgeo:v:6:y:2006:i:3:p:323-346

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  1. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
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  6. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
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  15. repec:rus:hseeco:122439 is not listed on IDEAS
  16. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  17. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 2002. "Taste heterogeneity, labor mobility and economic geography," Journal of Development Economics, Elsevier, vol. 69(1), pages 155-177, October.
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  19. Barry Chiswick, 1999. "Are Immigrants Favorably Self-Selected?," American Economic Review, American Economic Association, vol. 89(2), pages 181-185, May.
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