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Spatial Relocation with Heterogeneous Firms and Heterogeneous Sectors

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  • Forslid, Rikard
  • Okubo, Toshihiro

Abstract

The present paper focuses on sorting as a mechanism behind the well-established fact that there is a central region productivity premium. Using a model of heterogeneous firms that can move between regions, Baldwin and Okubo (2006) show how more productive firms sort themselves to the large core region. We extend this model by introducing different capital intensities among firms and sectors. In accordance with empirical evidence, more productive firms are assumed to be more capital intensive. As a result, our model can produce sorting to the large regions from both ends of the productivity distribution. Firms with high capital intensity and high productivity as well as firms with very low productivity and low capital intensity tend to relocate to the core. We use region and sector productivity distributions from Japanese micro data to test the predictions of the model. Several sectors show patterns consistent with two-sided sorting, and roughly an equal number of sectors seem to primarily be driven by sorting and selection. We also find supportive evidence for our model prediction that two-sided sorting occurs in sectors with a high capital intensity.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8117.

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Date of creation: Nov 2010
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Handle: RePEc:cpr:ceprdp:8117

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Keywords: agglomeration; firm heterogeneity; productivity; spatial sorting;

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  1. Pierre-Philippe COMBES & Gilles DURANTON & Laurent GOBILLON & Diego PUGA & Sébastien ROUX, 2009. "The Productivity Advantages of Large Cities : Distinguishing Agglomeration from Firm Selection," Working Papers 2009-08, Centre de Recherche en Economie et Statistique.
  2. Okubo, Toshihiro & Picard, Pierre M & Thisse, Jacques-François, 2008. "The Spatial Selection of Heterogeneous Firms," CEPR Discussion Papers 6978, C.E.P.R. Discussion Papers.
  3. OKUBO Toshihiro & TOMIURA Eiichi, 2010. "Productivity Distribution, Firm Heterogeneity, and Agglomeration: Evidence from firm-level data," Discussion papers 10017, Research Institute of Economy, Trade and Industry (RIETI).
  4. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
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  6. Ottaviano, Gianmarco & Melitz, Marc, 2008. "Market Size, Trade, and Productivity," Scholarly Articles 3229096, Harvard University Department of Economics.
  7. Massimo Del Gatto & Gianmarco I.P. Ottaviano & Marcello Pagnini, 2007. "Openess to trade and industry cost dispersion: Evidence from a panel of Italian firms," Temi di discussione (Economic working papers) 635, Bank of Italy, Economic Research and International Relations Area.
  8. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
  9. 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.
  10. Melo, Patricia C. & Graham, Daniel J. & Noland, Robert B., 2009. "A meta-analysis of estimates of urban agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 332-342, May.
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