The spatial selection of heterogeneous firms

Abstract

The aim of this paper is to study the spatial selection of …rms once it is recognized that heterogeneous …rms typically choose di¤erent locations in respond to market integration of regions having di¤erent sizes. Speci…cally, we show that decreasing trade costs leads to the gradual agglomeration of e¢ cient …rms in the large region because these …rms are able to survive in a more competitive environment. In contrast, high-cost …rms seek protection against competition from the e¢ cient …rms by establishing themselves in the small region. However, when the spatial separation of markets ceases to be a su¢ cient protection against competition from the low-cost …rms, high-cost …rms 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 di¤erences …rst increases and then decreases with market integration.

More similar firms — More similar regions? On the role of firm heterogeneity for agglomeration

“…In contrast to our paper, however, firm heterogeneity does not affect the homemarket effect and their model exhibits fewer economic channels than the richer coreperiphery model that we use. Okubo, Picard and Thisse (2010) consider two types of firm productivity and show that the more productive firm type selects into large markets when trade costs fall, but more high-cost firms find it also profitable to locate there if trade costs fall even further. This gives rise to an inverted U-shape relationship between economic integration and the international productivity gap.…”

Agglomeration Theory with Heterogeneous Agents

“…This finding relies on the identifying assumption that the underlying (unobserved) productivity distributions are the same in small and large cities, and the results are consistent with the CES model. 57 Okubo et al (2010) refer to the "spatial selection" of heterogeneous agents when talking about "sorting. "…”

“…(e.g., Mori and Turrini, 2005;Nocke, 2006;Baldwin and Okubo, 2006;Okubo et al, 2010), it predicts strict sorting along a single dimension. Yet, it is well known that there is a significant overlap of productivities in cities.…”

“…Although the sorting of workers across cities has attracted the most attention, a growing literature looks at the sorting of firms (see, e.g., Baldwin and Okubo, 2006;Forslid and Okubo, 2014;Nocke, 2006;Okubo et al, 2010). In a subnational context, we can think about the sorting of firms in the same way as we think about the sorting of entrepreneurs since it is fair to say that most firms move with the people running them.…”

Firms' locations under demand heterogeneity

“…The idea that heterogenous …rms select location of production according to their production performance is not new. The idea that more e¢ cient …rms 5 move and sort out in larger markets goes back at least to Syverson (2004), Nocke (2006), Okubo and Baldwin (2006), and Okubo et al (2010) who assume that …rms di¤er in cost. As presented in the above empirical studies, cost heterogeneity is not the only critical characteristic that explains trade patterns.…”