Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting

22 Pages Posted: 25 Oct 2004

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Toshihiro Okubo

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

Date Written: September 2004

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 relocating 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.

Keywords: Heterogeneous firms, economic geography, estimation of agglomeration economies, home market effect

JEL Classification: H32, P16

Suggested Citation

Baldwin, Richard E. and Okubo, Toshihiro, Heterogeneous Firms, Agglomeration and Economic Geography: Selection and Sorting (September 2004). Available at SSRN: https://ssrn.com/abstract=609892

Richard E. Baldwin (Contact Author)

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

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5933 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://www.hei.unige.ch/~baldwin/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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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