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Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting

Richard Baldwin () and Toshihiro Okubo ()

No 4602, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple NEG 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 productivity 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: economic geography; estimation of agglomeration economies; heterogeneous firms; home market effect (search for similar items in EconPapers)
JEL-codes: H32 P16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo and nep-ure
Date: 2004-09
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