DP8178 On the development strategy of countries of intermediate size - An analysis of heterogenous firms in a multiregion framework

Author(s): Rikard Forslid, Toshihiro Okubo
Publication Date: January 2011
Keyword(s): agglomeration, firm heterogeneity, multi-country model, relocation costs, trade liberalisation
JEL(s): F12, F15, F21, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8178

This paper compares two policies: trade cost reduction and firm relocation cost reduction using a three-country version of a heterogeneous-firms economic geography model, where the three countries have different market (population) size. We show how the effects of the two policies differ, in particular, for the country of intermediate size. Unless the intermediate country is very small, it will gain industry when relocation costs are reduced, but lose industry when trade costs are reduced. The smallest country loses industry in both cases, but only experiences lower welfare in the case of lower relocation costs. Thus, the ranking of the policies from the point of view of the two small and intermediate countries tends to be the opposite.