Karolina Ekholm () and Rikard Forslid ()
Karolina Ekholm: The Research Institute of Industrial Economics, Postal: P O Box 5501, SE-114 85 Stockholm, Sweden
Rikard Forslid: Lund University and CEPR, Postal: P O Box 7082, SE-220 07 Lund, Sweden
Abstract: This paper analyses the effect on agglomeration tendencies of allowing firms to become multi-region firms in a standard model of trade and location. More specifically, we introduce horizontal and vertical multi-region firms into the core-periphery (CP) model developed by Krugman (1991). The introduction of horizontal multi-region firms dampens the strong agglomeration effects found in the CP model by making the range of trade costs for which the core-periphery equilibrium occurs smaller. The introduction of vertical multi-region firms that can separate the location of headquarter activities from the location of production has two counteracting effects. First, headquarters have a strong tendency to agglomerate, and, in this sence, agglomeration tendencies are strengthened. Second, actual production tends to be more spread out, and, in this sense, they are weakened.
35 pages, October 1, 1998
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