Working Paper: CEPR ID: DP8117
Authors: Rikard Forslid; Toshihiro Okubo
Abstract: The present paper focuses on sorting as a mechanism behind the well-established fact that there is a central region productivity premium. Using a model of heterogeneous firms that can move between regions, Baldwin and Okubo (2006) show how more productive firms sort themselves to the large core region. We extend this model by introducing different capital intensities among firms and sectors. In accordance with empirical evidence, more productive firms are assumed to be more capital intensive. As a result, our model can produce sorting to the large regions from both ends of the productivity distribution. Firms with high capital intensity and high productivity as well as firms with very low productivity and low capital intensity tend to relocate to the core. We use region and sector productivity distributions from Japanese micro data to test the predictions of the model. Several sectors show patterns consistent with two-sided sorting, and roughly an equal number of sectors seem to primarily be driven by sorting and selection. We also find supportive evidence for our model prediction that two-sided sorting occurs in sectors with a high capital intensity.
Keywords: agglomeration; firm heterogeneity; productivity; spatial sorting
JEL Codes: F12; F15; F21; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-productivity firms relocate to core regions (R32) | average productivity in the core increases (O49) |
| low-productivity firms relocate to core regions (R32) | average productivity in the core increases (O49) |
| high-productivity firms relocate to core regions (R32) | average productivity in the periphery decreases (O49) |
| low-productivity firms relocate to core regions (R32) | average productivity in the periphery decreases (O49) |
| two-sided sorting phenomenon (C78) | average productivity in the core increases (O49) |
| high capital requirements (G28) | higher productivity in the core compared to the periphery (O49) |
| capital-labor ratio of a sector (J24) | tendency for two-sided sorting (C69) |
| sorting (C69) | spread in the core increases (R12) |
| selection (Y60) | spread in the core decreases (R12) |