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Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting

Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting 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 relocating 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 and the lowest productivity firms to the periphery. We also show that heterogeneity dampens the home market effect. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Geography Oxford University Press

Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting

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References (32)

Publisher
Oxford University Press
Copyright
© The Author (2005). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org
ISSN
1468-2702
eISSN
1468-2710
DOI
10.1093/jeg/lbi020
Publisher site
See Article on Publisher Site

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 relocating 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 and the lowest productivity firms to the periphery. We also show that heterogeneity dampens the home market effect.

Journal

Journal of Economic GeographyOxford University Press

Published: Jun 10, 2006

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