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Firms Location under Demand Heterogeneity

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  • Pierre M. Picard

    ()
    (CREA, University of Luxembourg (Luxembourg), and CORE, Université catholique de Louvain (Belgium).)

  • Toshihiro Okubo

    (RIEB, Kobe University)

Abstract

In this paper we build an economic geography model where firms sell product varieties with heterogenous demands. We show that firms selling the products with higher demands select to set up their plants in larger countries. Larger countries do not only get better access to more varieties but also to the most demanded and valuable ones. The impact of such a spatial selection on firms' location choice depends on the skewness of the distribution of demand intensity across varieties. In a model where only capital moves across regions, demand heterogeneity generally diminishes the amount of capital invested in the larger country. In a model where the work force moves across regions, demand heterogeneity is shown to eliminate dramatic changes in the location patterns and to result in the asymmetric dispersion of workers, rather their symmetric dispersion or complete agglomeration in a specific region.

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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 11-07.

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Date of creation: 2011
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Handle: RePEc:luc:wpaper:11-07

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Keywords: heterogeneous taste and quality; spatial selection; economic geography; agglomeration; home market effect;

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Cited by:
  1. Holger Breinlich & Gianmarco I. P. Ottaviano & Jonathan R. W. Temple, 2013. "Regional growth and regional decline," LSE Research Online Documents on Economics 51575, London School of Economics and Political Science, LSE Library.
  2. PICARD, Pierre M., 2013. "Trade, economic geography and the choice of product quality," CORE Discussion Papers 2013039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Toshihiro Okubo & Pierre Picard & Jacques-François Thisse, 2014. "On the impact of competition on trade and firm location," CREA Discussion Paper Series 14-05, Center for Research in Economic Analysis, University of Luxembourg.
  4. Forslid, Rikard & Okubo, Toshihiro, 2013. "Which Firms are Left in the Periphery? - Spatial Sorting of Heterogeneous Firms with Scale Economies in Transportation," Research Papers in Economics 2013:9, Stockholm University, Department of Economics.
  5. Ottaviano, Gianmarco, 2012. "Agglomeration,Trade and Selection," CEPR Discussion Papers 9046, C.E.P.R. Discussion Papers.

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