Working Paper: NBER ID: w11650
Authors: Richard Baldwin; Toshihiro Okubo
Abstract: A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple New Economic Geography model to show that the standard assumption of identical firms is neither necessary nor innocuous. We show that re-locating to the big region is most attractive for the most productive firms; this implies interesting results for empirical work and policy analysis. A 'selection effect' means standard empirical measures overestimate agglomeration economies. A 'sorting effect' means that a regional policy induces the highest productivity firms to move to the core while the lowest productivity firms to move to the periphery. We also show that heterogeneity dampens the home market effect.
Keywords: heterogeneous firms; economic geography; estimation of agglomeration economies; home market effect
JEL Codes: H32; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm Productivity (D21) | Location Choice (R30) |
| Selection Effect (C24) | Empirical Measures of Agglomeration Economies (R12) |
| Firm Productivity (D21) | Selection Effect (C24) |
| Regional Policies (R58) | Sorting Effect (C69) |
| Sorting Effect (C69) | Location of Firms (R30) |
| Firm Characteristics (L25) | Geographic Economic Outcomes (R12) |