Heterogeneous firms, trade liberalization and agglomeration
In this study, we develop an economic model to examine agglomeration of heterogeneous firms following trade liberalization. In a closed economy, we show that high-productivity firms are more likely to agglomerate because they benefit more from agglomeration than their low-productivity counterparts. However, trade liberalization, especially with a high-productivity partner, favours partial agglomeration; that is, low-productivity firms relocate away from the region where high-productivity firms agglomerate. Consequently, the welfare gap between the domestic regions of an economy narrows following trade liberalization. The latter result suggests that trade liberalization promotes regional economic development.
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Volume (Year): 44 (2011)
Issue (Month): 2 (May)
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