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Home Market Effect, regulation costs and heterogeneous firms

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Author Info
Toshihiro Okubo () (Graduate Institute of International Studies, Geneva (HEI))
Vincent Rebeyrol () (Centre d'Economie de la Sorbonne)

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Abstract

This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm heterogeneity in marginal costs. 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 HME first rises and then fall in terms of trade openness, whereas the HME rises in terms of regulation costs gap coordination by technical barriers to trade (TBT) agreements. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfectspatial sorting, in which a large country attracts only high productivity firms, and vice versa.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number bla06056.

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Length: 23 pages
Date of creation: Jul 2006
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Handle: RePEc:mse:wpsorb:bla06056

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Related research
Keywords: Home market effect; firm heterogeneity; regulation costs; technical barriers to trade.;

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration
R12 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
R38 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Government Policies; Regulatory Policies

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  1. Baldwin, Richard & Robert-Nicoud, Frédéric, 2005. "Trade and Growth with Heterogeneous Firms," CEPR Discussion Papers 4965, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. 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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  3. 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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  4. 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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  5. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  6. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling Trade Costs, Heterogeneous Firms, and Industry Dynamics," NBER Working Papers 9639, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2004. "Spatial Wage Disparities: Sorting Matters!," CEPR Discussion Papers 4240, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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