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Home Market Effect and Regulation Costs - Homogeneous Firm and Heterogeneous Firm Trade Models

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  • Toshihiro Okubo

    ()
    (IUHEI, The Graduate Institute of International Studies, Geneva)

  • Vincent Rebeyrol

    ()
    (TEAM, University of Paris 1, Paris)

Abstract

This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm marginal costs heterogeneity. Our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The Home Market Magnification Effect (HMME) in terms of trade openness is hump-shaped, whereas the pro-HMME in terms of regulation costs coordination by technical barriers to trade (TBT) agreements can be found. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfect spatial sorting, in which a large country attracts only high productivity firms and vice versa.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 02-2006.

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Length: 24
Date of creation: 15 Jan 2006
Date of revision:
Handle: RePEc:gii:giihei:heiwp02-2006

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Keywords: regulation costs; market potential; perfect spatial sorting; home market effect; home market magnification effect; firm heterogeneity; technical barriers to trade;

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References

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  1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  2. Robert Baldwin & Frédéric Robert-Nicoud, 2006. "Trade and growth with heterogeneous firms," LSE Research Online Documents on Economics 19856, London School of Economics and Political Science, LSE Library.
  3. Keith Head & John Ries, 2003. "Heterogeneity and the FDI versus Export Decision of Japanese Manufacturers," NBER Working Papers 10052, National Bureau of Economic Research, Inc.
  4. Brülhart, Marius & Trionfetti, Federico, 2005. "A Test of Trade Theories when Expenditure is Home Biased," CEPR Discussion Papers 5097, C.E.P.R. Discussion Papers.
  5. Davis, D.R. & Weinstein, D.E., 1997. "Does Economic Geography Matter for International Specialization?," Papers 591, Harvard - Institute for International Development.
  6. BEHRENS, Kristian & THISSE, Jacques-François, 2005. "Regional inequality and product variety," CORE Discussion Papers 2005009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Matthieu Crozet & Federico Trionfetti, 2007. "Trade Costs and the Home Market Effect," Working Papers 2007-05, CEPII research center.
  8. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography, and Comparative Advantage: An Empirical Assessment," NBER Working Papers 6787, National Bureau of Economic Research, Inc.
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Cited by:
  1. Gabriel J. Felbermayr & Benjamin Jung, 2011. "Home Market Effects and the Single-Sector Melitz Model," CESifo Working Paper Series 3695, CESifo Group Munich.
  2. Toshihiro Okubo, 2006. "Trade Liberalisation and Agglomeration with Firm Heterogeneity - Forward and Backward Linkages," IHEID Working Papers 17-2006, Economics Section, The Graduate Institute of International Studies.

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