The spatial selection of heterogeneous quality: An approach using different demand elasticities

Ching-mu Chen and Dao-Zhi Zeng ()

International Journal of Economic Theory, 2014, vol. 10, issue 2, 179-202

Abstract: type="main" xml:lang="en">

This paper incorporates heterogeneous demand elasticities and the quality/skill complementarity of production in a footloose capital model in order to explain the spatial selection of firms with differentiated quality. We find that when trade becomes freer, high-quality firms agglomerate in the region that accommodates more high-skilled labor, whereas low-quality firms move to the region that hosts more low-skilled labor. If trade freeness is high, the spatial separation of high- and low-quality firms occurs. This paper also points out the positive effect of integration on welfare owing to the specialization of product quality.

Date: 2014
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