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

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Author Info
Toshihiro Okubo () (IUHEI, The Graduate Institute of International Studies, Geneva)
Vincent Rebeyrol () (TEAM, University of Paris 1, Paris)

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

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Length: 24
Date of creation: 15 Jan 2006
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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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  2. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  3. Donald R. Davis & David E. Weinstein, 1996. "Does Economic Geography Matter for International Specialization?," NBER Working Papers 5706, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December. [Downloadable!] (restricted)
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  5. Marius BRÜLHART & Federico TRIONFETTI, 2001. "A Test of Trade Theories when Expenditure is Home Biased," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.11, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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  6. 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. [Downloadable!] (restricted)
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  7. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  8. BEHRENS, Kristian & THISSE, Jacques-Franois, 2005. "Regional inequality and product variety," CORE Discussion Papers 2005009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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  1. Toshihiro Okubo, . "Trade Liberalisation and Agglomeration with Firm Heterogeneity----Forward and Backward Linkages," HEI Working Papers 16-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
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