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Home Market Effect, regulation costs and heterogeneous firms

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Abstract

This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm heterogeneity in marginal costs. our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The HME first rises and then fall in terms of trade openness, whereas the HME rises in terms of regulation costs gap coordination by technical barriers to trade (TBT) agreements. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfectspatial sorting, in which a large country attracts only high productivity firms, and vice versa.

Suggested Citation

  • Toshihiro Okubo & Vincent Rebeyrol, 2006. "Home Market Effect, regulation costs and heterogeneous firms," Cahiers de la Maison des Sciences Economiques bla06056, Université Panthéon-Sorbonne (Paris 1).
  • Handle: RePEc:mse:wpsorb:bla06056
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    Cited by:

    1. Forslid, Rikard & Okubo, Toshihiro, 2012. "On the development strategy of countries of intermediate size—An analysis of heterogeneous firms in a multi-region framework," European Economic Review, Elsevier, vol. 56(4), pages 747-756.
    2. Eero Lehto, 2011. "On regional specialization of high- and low-tech industries," ERSA conference papers ersa11p832, European Regional Science Association.
    3. Hege Medin, 2017. "The reverse home-market effect in exports: a cross-country study of the extensive margin of exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(2), pages 301-325, May.

    More about this item

    Keywords

    Home market effect; firm heterogeneity; regulation costs; technical barriers to trade.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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