Firm Heterogeneity and Location Choice
AbstractHeterogeneity in firm productivity affects the location patterns of firm and agglomeration. Here we provide an economic geography model, involving forward and backward linkages driven by the migration of a footloose entrepreneur (capital owner) with different productivity. As a result we find a sorting equilibrium characterised by co-agglomeration of similar productivity firms, however, in contrast to previous studies, unproductive firms are more likely to agglomerate than their more productive counterparts. This is due to the increasingly severe competition induced by productive firms. Productive firms prevent severe local competition through their co-agglomeration. In terms of social welfare, although the sorting equilibrium involves higher social welfare than a perfectly symmetric pattern of firm location, the market outcome is sub-optimal and induces too much agglomeration.
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Bibliographic InfoPaper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2010-11.
Length: 31 pages
Date of creation: Apr 2010
Date of revision:
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Heterogeneous firms; Footloose entrepreneurs; Competition; Productivity; Economic geography;
Find related papers by JEL classification:
- F15 - International Economics - - Trade - - - Economic Integration
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-11 (All new papers)
- NEP-BEC-2010-04-11 (Business Economics)
- NEP-GEO-2010-04-11 (Economic Geography)
- NEP-INT-2010-04-11 (International Trade)
- NEP-URE-2010-04-11 (Urban & Real Estate Economics)
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