Working Paper: CEPR ID: DP8178
Authors: Rikard Forslid; Toshihiro Okubo
Abstract: This paper compares two policies: trade cost reduction and firm relocation cost reduction using a three-country version of a heterogeneous-firms economic geography model, where the three countries have different market (population) size. 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, 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.
Keywords: agglomeration; firm heterogeneity; multicountry model; relocation costs; trade liberalisation
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 |
|---|---|
| reduced relocation costs (R38) | intermediate country gains industry (F29) |
| reduced trade costs (F12) | intermediate country loses industry (O14) |
| reduced relocation costs (R38) | smallest country loses industry (O14) |
| reduced trade costs (F12) | smallest country loses industry (O14) |
| reduced relocation costs (R38) | smallest country lower welfare (I30) |