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Heterogeneous Firms, Agglomeration and Economic Geography: Spatial Selection and Sorting

Richard Baldwin and Toshihiro Okubo

No 11650, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H32 P16 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-geo, nep-pbe and nep-ure
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

Published as Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.

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