DP9046 Agglomeration,Trade and Selection

Author(s): Gianmarco Ottaviano
Publication Date: July 2012
Keyword(s): agglomeration, economic geography, heterogeneity, selection, trade
JEL(s): F12, R11, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9046

This paper studies how firm heterogeneity in terms of productivity affects the balance between agglomeration and dispersion forces in the presence of pecuniary externalities through a selection model of monopolistic competition with endogenous markups. It shows that firm heterogeneity matters. However, whether it shifts the balance from agglomeration to dispersion or the other way round depends on its specific features along the two defining dimensions of diversity: `richness' and `evenness'. Accordingly, the role of firm heterogeneity in selection models of agglomeration can not be fully understood without paying due attention to various moments of the underlying firm productivity distribution.