Heterogeneous firms, trade liberalization and agglomeration

Heterogeneous firms, trade liberalization and agglomeration

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Article ID: iaor201111959
Volume: 44
Issue: 2
Start Page Number: 541
End Page Number: 560
Publication Date: May 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: , ,
Keywords: simulation: applications
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.

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