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CEP discussion paper
Agglomeration, Trade and Selection
Gianmarco I. P. Ottaviano
February 2012
Paper No' CEPDP1129:
Full Paper (pdf)

JEL Classification: F12; R11; R12

Tags: agglomeration; trade; heterogeneity; selection; economic geography

This paper studies how firm heterogeneity in terms of productivity affects the balance between agglomeration and dispersion forces in the presence of pecuniary externalities through a selection model of monopolistic competition with variable mark-ups. It shows that firm heterogeneity matters. However, whether it shifts the balance from agglomeration to dispersion or the other way round depends on its specific features along the two defining dimensions of diversity: ‘richness’ and ‘evenness’. Accordingly, the role of firm heterogeneity in selection models of agglomeration cannot be fully understood without paying due attention to various moments of the underlying firm productivity distribution.