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On the development strategy of countries of intermediate size - An analysis of heterogeneous firms in a multi-region framework

  • Rikard Forslid

    (Stockholm University and CEPR)

  • Toshihiro Okubo

    (Keio University)

This paper compares two policies: trade cost reduction and firm relocation cost reduction using a three-country version of a heterogeneous-firms geography and trade model, where the three countries have different market (population) sizes. We show how the effects of the two policies differ, in particular for the country of intermediate size. Unless the intermediate country is very small, in a relative sense, it will gain industry when relocation costs are reduced, but lose industry when trade costs are reduced. The smallest country loses industry in both cases, but only experiences lower welfare in the case of lower relocation costs. Thus, the ranking of the policies from the point of view of the two small and intermediate countries tends to be the opposite.

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File URL: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2011-029.pdf
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Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2011-029.

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Length: 18 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:kei:dpaper:2011-029
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