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

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Author Info
Richard E. Baldwin
Toshihiro Okubo

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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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File URL: http://hdl.handle.net/10.1093/jeg/lbi020
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Publisher 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. 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. [Downloadable!] (restricted)
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  2. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September. [Downloadable!]
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  3. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November. [Downloadable!] (restricted)
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  4. Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-FranÁois Thisse, 2002. "Agglomeration and Trade Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 409-436, May. [Downloadable!] (restricted)
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  5. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling Trade Costs, Heterogeneous Firms, and Industry Dynamics," NBER Working Papers 9639, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Fujita, Masahisa & Thisse, Jacques-François, 1996. "Economics of Agglomeration," CEPR Discussion Papers 1344, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. George J. Borjas & Stephen G. Bronars & Stephen J. Trejo, 1992. "Self-Selection and Internal Migration in the United States," NBER Working Papers 4002, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November. [Downloadable!] (restricted)
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  10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  11. Mary Amiti & Christopher A. Pissarides, 2004. "Trade and Industrial Location with Heterogeneous Labor," IMF Working Papers 04/103, International Monetary Fund. [Downloadable!]
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  12. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476.
  13. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-59, May.
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  14. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June. [Downloadable!] (restricted)
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  15. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March. [Downloadable!]
  16. repec:rus:hseeco:122439 is not listed on IDEAS
  17. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Blackwell Publishing, vol. 75(1), pages 295-316, 01. [Downloadable!] (restricted)
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  18. Barry Chiswick, 1999. "Are Immigrants Favorably Self-Selected?," American Economic Review, American Economic Association, vol. 89(2), pages 181-185, May. [Downloadable!] (restricted)
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