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Firms Location under Demand Heterogeneity

  • Pierre M. Picard

    ()

    (CREA, University of Luxembourg (Luxembourg), and CORE, Université catholique de Louvain (Belgium).)

  • Toshihiro Okubo

    (RIEB, Kobe University)

In this paper we build an economic geography model where firms sell product varieties with heterogenous demands. We show that firms selling the products with higher demands select to set up their plants in larger countries. Larger countries do not only get better access to more varieties but also to the most demanded and valuable ones. The impact of such a spatial selection on firms' location choice depends on the skewness of the distribution of demand intensity across varieties. In a model where only capital moves across regions, demand heterogeneity generally diminishes the amount of capital invested in the larger country. In a model where the work force moves across regions, demand heterogeneity is shown to eliminate dramatic changes in the location patterns and to result in the asymmetric dispersion of workers, rather their symmetric dispersion or complete agglomeration in a specific region.

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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 11-07.

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Date of creation: 2011
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Handle: RePEc:luc:wpaper:11-07
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