Heterogeneous Firms, Trade Liberalization and Agglomeration

Abstract:     
In this study, we develop an economic model to examine agglomeration of heterogeneous firms following trade liberalization. In a closed economy, we show that high-productivity firms are more likely to agglomerate because they benefit more from agglomeration than their low-productivity counterparts. However, trade liberalization, especially with a high-productivity partner, favours partial agglomeration; that is, low-productivity firms relocate away from the region where high-productivity firms agglomerate. Consequently, the welfare gap between the domestic regions of an economy narrows following trade liberalization. The latter result suggests that trade liberalization promotes regional economic development.

On dveloppe un modle conomique pour examiner lagglomration de firmes htrognes la suite de la libralisation du commerce. Dans une conomie ferme, on montre que les firmes haute productivit sont davantage susceptibles de sagglomrer parce quelles tirent plus davantages de lagglomration que les firmes basse productivit. Cependant, la libralisation du commerce, en particulier avec un partenaire haute productivit, favorise lagglomration partielle, i.e., que les firmes basse productivit se relocalise hors de la rgion o les firmes haute productivit sagglomrent. En consquence, lcart de bien-tre entre les rgions domestiques dune conomie samenuise la suite de la libralisation du commerce. Ce dernier rsultat suggre que la libralisation du commerce favorise le dveloppement conomique rgional.

Number of Pages in PDF File: 20

JEL Classification: F15, R12

Accepted Paper Series