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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 2010:28:
On the Development Strategy of Countries of Intermediate size - An Analysis of Heterogenous Fims in a Multiregion Framework

Rikard Forslid () and Toshihiro Okubo ()

Abstract: This paper compares two policies: trade cost reduction and firm relocation cost reduction using a three-country version of a heterogeneous-firms economic geography model, where the three countries have different market (population) size. We show how the effects of the two policies differ, in particular, for the country of intermediate size. Unless the intermediate country is very small, it will gain industry when relocation costs are reduced, but lose industry when trade costs are reduced. The smallest country loses industry in both cases, but only experiences lower welfare in the case of lower relocation costs. Thus, the ranking of the policies from the point of view of the two small and intermediate countries tends to be the opposite.

Keywords: Agglomeration; firm heterogeneity; multi-country model; trade liberalisation; relocation costs; (follow links to similar papers)

JEL-Codes: F12; F15; F21; R12; (follow links to similar papers)

26 pages, December 20, 2010

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