The Spatial Selection of Heterogeneous Firms

42 Pages Posted: 2 Dec 2008

See all articles by Toshihiro Okubo

Toshihiro Okubo

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

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA); Universite du Luxembourg

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Date Written: September 2008

Abstract

The aim of this paper is to study the spatial selection of firms once it is recognized that heterogeneous firms typically choose different locations in respond to market integration of regions having different sizes. Specifically, we show that decreasing trade costs leads to the gradual agglomeration of efficient firms in the large region because these firms are able to survive in a more competitive environment. In contrast, high-cost firms seek protection against competition from the efficient firms by establishing themselves in the small region. However, when the spatial separation of markets ceases to be a sufficient protection against competition from the low-cost firms, high-cost firms also choose to set up in the larger market where they have access to a bigger pool of consumers. This leads to the following prediction: the relationship between economic integration and interregional productivity differences first increases and then decreases with market integration.

Keywords: firm heterogeneity, spatial selection, trade liberalization

JEL Classification: F12, H22, H87, R12

Suggested Citation

Okubo, Toshihiro and Picard, Pierre M. and Thisse, Jacques-François, The Spatial Selection of Heterogeneous Firms (September 2008). CEPR Discussion Paper No. DP6978. Available at SSRN: https://ssrn.com/abstract=1308049

Toshihiro Okubo

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

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

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Universite du Luxembourg

L-1511 Luxembourg
Luxembourg

Jacques-François Thisse (Contact Author)

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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