Heterogeneous firms, agglomeration and economic geography: Spatial selection and sorting

Richard E. Baldwin, Toshihiro Okubo

Research output: Contribution to journalArticlepeer-review

258 Citations (Scopus)


A Melitz-style model of monopolistic competition with heterogeneous firms is integrated into a simple new economic geography model to show that the standard assumption of identical firms is neither necessary nor innocuous. We show that relocating to the big region is most attractive for the most productive firms; this implies interesting results for empirical work and policy analysis. A 'selection effect' means standard empirical measures overestimate agglomeration economies. A 'sorting effect' means that a regional policy induces the highest productivity firms to move to the core and the lowest productivity firms to the periphery. We also show that heterogeneity dampens the home market effect.

Original languageEnglish
Pages (from-to)323-346
Number of pages24
JournalJournal of Economic Geography
Issue number3
Publication statusPublished - 2006 Jun
Externally publishedYes


  • Economic geography
  • Estimation of agglomeration economies
  • Heterogeneous firms
  • Home market effect

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Economics and Econometrics


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