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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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  1. Brülhart, Marius & Trionfetti, Federico, 2009. "A test of trade theories when expenditure is home biased," European Economic Review, Elsevier, vol. 53(7), pages 830-845, October.
  2. Baldwin, Richard & Robert-Nicoud, Frédéric, 2006. "Trade and Growth with Heterogenous Firms," CEPR Discussion Papers 5563, C.E.P.R. Discussion Papers.
  3. 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.
  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.
  5. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography and Comparative Advantage: An Empirical Assessment," Harvard Institute of Economic Research Working Papers 1850, Harvard - Institute of Economic Research.
  6. Kristian, BEHRENS & Jacques-François, THISSE, 2005. "Regional inequality and product variety," Discussion Papers (ECON - Département des Sciences Economiques) 2005013, Université catholique de Louvain, Département des Sciences Economiques.
  7. Donald R. Davis & David E. Weinstein, 1996. "Does Economic Geography Matter for International Specialization?," NBER Working Papers 5706, National Bureau of Economic Research, Inc.
  8. Matthieu Crozet & Federico Trionfetti, 2007. "Trade Costs and the Home Market Effect," Working Papers 2007-05, CEPII research center.
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Cited by:
  1. 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.
  2. Gabriel J. Felbermayr & Benjamin Jung, 2011. "Home Market Effects and the Single-Sector Melitz Model," CESifo Working Paper Series 3695, CESifo Group Munich.

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