The home market effect, regional inequality, and intra-industry reallocations

Gabriel Felbermayr and Benjamin Jung

No 33, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: In New Trade Theory models, the larger region hosts an overproportionate share of producers. This Home Market Effect (HME) exacerbates regional income discrepancies caused by trade frictions or technology differences. With homogeneous firms, it requires inter-industry reallocations to emerge. We present a heterogeneous firms single-sector model with fixed market access costs, in which the HME arises exclusively from empirically more relevant intra-industry reallocations. It is magnified by lower trade costs or higher heterogeneity. In contrast to multi-industry models, a more pronounced HME leads to regional income convergence as adjustment of the firm size distribution counteracts the effects of firmentry.

Keywords: Home Market Effect; Regional Inequality; Monopolistic Competition; Heterogeneous Firms; Economic Geography (search for similar items in EconPapers)
JEL-codes: F12 R12 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-geo, nep-int and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:33

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