On the Development Strategy of Countries of Intermediate Size - An Analysis of Heterogenous Firms in a Multiregion Framework

29 Pages Posted: 18 Jan 2011

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: January 2011

Abstract

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.

Keywords: agglomeration, firm heterogeneity, multi-country model, relocation costs, trade liberalisation

JEL Classification: F12, F15, F21, R12

Suggested Citation

Forslid, Rikard and Okubo, Toshihiro, On the Development Strategy of Countries of Intermediate Size - An Analysis of Heterogenous Firms in a Multiregion Framework (January 2011). CEPR Discussion Paper No. DP8178, Available at SSRN: https://ssrn.com/abstract=1742723

Rikard Forslid (Contact Author)

Stockholm University ( email )

Universitetsvägen 10 A
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Frescati, Stockholm
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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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