Working Paper: CEPR ID: DP6978
Authors: Toshihiro Okubo; Pierre M. Picard; Jacques-François Thisse
Abstract: The aim of this paper is to study the spatial selection of firms once it is recognized that heterogeneous firms typically choose different locations in respond to market integration of regions having different sizes. Specifically, we show that decreasing trade costs leads to the gradual agglomeration of efficient firms in the large region because these firms are able to survive in a more competitive environment. In contrast, high-cost firms seek protection against competition from the efficient firms by establishing themselves in the small region. However, when the spatial separation of markets ceases to be a sufficient protection against competition from the low-cost firms, high-cost firms also choose to set up in the larger market where they have access to a bigger pool of consumers. This leads to the following prediction: the relationship between economic integration and interregional productivity differences first increases and then decreases with market integration.
Keywords: firm heterogeneity; spatial selection; trade liberalization
JEL Codes: F12; H22; H87; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decreasing trade costs (F12) | agglomeration of efficient firms in larger markets (F12) |
| initial location in smaller markets (R32) | later relocation to larger markets (R23) |
| economic integration (F15) | interregional productivity differences (O49) |