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Trade, firm selection, and industrial agglomeration

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  • Hsu, Wen-Tai
  • Wang, Ping

Abstract

We develop a model of trade and agglomeration that incorporates trade in both intermediate goods and final goods and allows all firms to choose their locations. There are two types of labor: skilled labor, which is mobile, and unskilled labor, which is immobile. Upon choosing its factory site, a final goods firm that is managed by skilled labor can produce these goods using local unskilled labor and a variety of intermediate goods produced by productivity-heterogeneous producers. We characterize world equilibrium and establish the conditions under which industrial agglomeration arises as a stable equilibrium outcome. We show that when the unskilled labor force is small, the role played by the selection of intermediate firms becomes less important, and trade liberalization induces dispersion. When the unskilled labor force is large and the selection effect becomes influential, trade liberalization can generate non-monotonic effects on industrial agglomeration. The dispersion effect of trade liberalization arises when unskilled labor–intermediate input complementarity matters to firm selection to a greater degree. When this is the case, trade liberalization may induce less selective firm entry and cause average productivity to fall.

Suggested Citation

  • Hsu, Wen-Tai & Wang, Ping, 2012. "Trade, firm selection, and industrial agglomeration," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 975-986.
  • Handle: RePEc:eee:regeco:v:42:y:2012:i:6:p:975-986 DOI: 10.1016/j.regsciurbeco.2012.05.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Intermediate goods trade; Firm distribution; Firm's locational choice; Agglomeration;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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