Spatial Relocation with Heterogeneous Firms and Heterogeneous Sectors

38 Pages Posted: 29 Nov 2010

See all articles by Rikard Forslid

Rikard Forslid

Stockholm University; Centre for Economic Policy Research (CEPR)

Toshihiro Okubo

University of Geneva - Graduate Institute of International Studies (HEI)

Date Written: November 2010

Abstract

The present paper focuses on sorting as a mechanism behind the well-established fact that there is a central region productivity premium. Using a model of heterogeneous firms that can move between regions, Baldwin and Okubo (2006) show how more productive firms sort themselves to the large core region. We extend this model by introducing different capital intensities among firms and sectors. In accordance with empirical evidence, more productive firms are assumed to be more capital intensive. As a result, our model can produce sorting to the large regions from both ends of the productivity distribution. Firms with high capital intensity and high productivity as well as firms with very low productivity and low capital intensity tend to relocate to the core. We use region and sector productivity distributions from Japanese micro data to test the predictions of the model. Several sectors show patterns consistent with two-sided sorting, and roughly an equal number of sectors seem to primarily be driven by sorting and selection. We also find supportive evidence for our model prediction that two-sided sorting occurs in sectors with a high capital intensity.

Keywords: agglomeration, firm heterogeneity, productivity, spatial sorting

JEL Classification: F12, F15, F21, R12

Suggested Citation

Forslid, Rikard and Okubo, Toshihiro, Spatial Relocation with Heterogeneous Firms and Heterogeneous Sectors (November 2010). CEPR Discussion Paper No. DP8117, Available at SSRN: https://ssrn.com/abstract=1714889

Rikard Forslid (Contact Author)

Stockholm University ( email )

Universitetsvägen 10 A
House A, floor 4 and 7
Frescati, Stockholm
Sweden
+46 8 16 3096 (Phone)
+46 8 15 9482 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Toshihiro Okubo

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5900 (Phone)

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