Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2010:17: Spatial Relocation with Heterogeneous Firms and Heterogeneous Sectors

Rikard Forslid () and Toshihiro Okubo ()
Additional contact information
Rikard Forslid: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden, and CEPR
Toshihiro Okubo: Kobe University, Postal: Research Institute for Economics & Business Administration (RIEB), Kobe University, 2-1, Rokkodai cho, Nada-ku, Kobe, 657-8501 JAPAN

Abstract: The present paper focuses on sorting as a mechanism behind the well-established fact that there is a central region productivity premium. Using a model of heterogeneous firms that can move between regions, Baldwin and Okubo (2006) show how more productive firms sort themselves to the large core region. We extend this model by introducing different capital intensities among firms and sectors. In accordance with empirical evidence, more productive firms are assumed to be more capital intensive. As a result, our model can produce sorting to the large regions from both ends of the productivity distribution. Firms with high capital intensity and high productivity as well as firms with very low productivity and low capital intensity tend to relocate to the core. We use region and sector productivity distributions from Japanese micro data to test the predictions of the model. Several sectors show patterns consistent with two-sided sorting, and roughly an equal number of sectors seem to primarily be driven by sorting and selection. We also find supportive evidence for our model prediction that two-sided sorting occurs in sectors with a high capital intensity.

Keywords: Agglomeration; firm heterogeneity; productivity; spatial sorting

JEL-codes: F12; F15; F21; R12

35 pages, November 4, 2010

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