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Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting

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  • Baldwin, Richard
  • Okubo, Toshihiro

Abstract

A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple NEG 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 productivity 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.

Suggested Citation

  • Baldwin, Richard & Okubo, Toshihiro, 2004. "Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting," CEPR Discussion Papers 4602, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4602
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    Citations

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    Cited by:

    1. Kyoji Fukao; Toshihiro Okubo, 2004. "Why Has the Border Effect in the Japanese Market Declined?," IHEID Working Papers 12-2004, Economics Section, The Graduate Institute of International Studies.
    2. Toshihiro Okubo, 2004. "Intra-industry Trade and Production Networks," IHEID Working Papers 13-2004, Economics Section, The Graduate Institute of International Studies.
    3. Giordano Mion & Paolo Naticchioni, 2009. "The spatial sorting and matching of skills and firms," Canadian Journal of Economics, Canadian Economics Association, vol. 42(1), pages 28-55, February.
    4. Nuria Domeque Claver & Carmen Fillat Castejón & Fernando Sanz Gracia, 2011. "The home market effect in the Spanish industry, 1965–1995," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(2), pages 379-396, April.
    5. Damiaan Persyn, 2006. "Trade and Race-to-the-bottom Wage Competition," LICOS Discussion Papers 17306, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    6. Vincent Rebeyrol, 2009. "Trade Liberalization, Offshoring and Firm Heterogeneity," Economics Working Papers ECO2009/26, European University Institute.

    More about this item

    Keywords

    economic geography; estimation of agglomeration economies; heterogeneous firms; home market effect;

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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