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Heterogeneous Firms, Agglomeration and Economic Geography: Spatial Selection and Sorting

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  • Richard Baldwin
  • Toshihiro Okubo

Abstract

A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple New Economic Geography model to show that the standard assumption of identical firms is neither necessary nor innocuous. We show that re-locating to the big region is most attractive for the most productive firms; this implies interesting results for empirical work and policy analysis. A 'selection effect' means standard empirical measures overestimate agglomeration economies. A 'sorting effect' means that a regional policy induces the highest productivity firms to move to the core while the lowest productivity firms to move to the periphery. We also show that heterogeneity dampens the home market effect.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11650.

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Date of creation: Oct 2005
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Publication status: published as Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
Handle: RePEc:nbr:nberwo:11650

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  1. OTTAVIANO, Gianmarco & TABUCHI , Takatoshi & THISSE, Jacques-François, . "Agglomeration and trade revisited," CORE Discussion Papers RP -1553, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. Borjas, George J. & Bronars, Stephen G. & Trejo, Stephen J., 1992. "Self-selection and internal migration in the United States," Journal of Urban Economics, Elsevier, vol. 32(2), pages 159-185, September.
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  15. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  16. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
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  19. Barry Chiswick, 1999. "Are Immigrants Favorably Self-Selected?," American Economic Review, American Economic Association, vol. 89(2), pages 181-185, May.
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