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

Author(s): Richard Baldwin and Toshihiro Okubo

Publication Date: September 2004

Keyword(s): economic geography, estimation of agglomeration economies, heterogeneous firms and home market effect

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Baldwin, R and Okubo, T. 2004. 'Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4602