اثرات بازار خانه با هزینه های درونی تولید

In a standard imperfect competition model, we endogenize the costs of production of firms in the increasing returns sector (IRS) via process R&D. We show that firms in the larger region in terms of demand invest more in R&D (i.e.: they are bigger in size and have lower marginal costs) than firms in the smaller region, since the former exploit larger economies of scale in production to pay for the costs of R&D. As a result, when the return on R&D is high, the larger region does not employ disproportionately more labor nor attracts a disproportionately larger share of firms in the IRS in relation to share of demand it hosts, i.e.: negative home market effects (HMEs) in employment and in the number of firms. When this occurs, only partial agglomeration of the IRS in the larger region is sustainable in equilibrium. Even so, the larger region always runs trade surplus in the IRS, i.e.: HME in trade patterns.

In 2008, Paul Krugman won the Nobel Memorial Prize in Economics for his contributions to the “new” trade theory and to the “new” economic geography (Krugman, 1980 and Krugman, 1991). Central to both of these theories are the so-called “home market effects” (HMEs). In a two-region economy, the HMEs predict that the larger region in terms of demand, in comparison to the smaller region: (i) attracts a disproportionately higher share of firms in the increasing returns sector (IRS) in relation to the share of demand it hosts (HME in the number of firms); (ii) uses disproportionately more factors of production in the IRS in relation to the share of demand it hosts (HME in employment); and (iii) runs trade surplus in the IRS (HME in trade patterns).

Home market effects (HMEs) are the cornerstone of the trade-geography literature. The HMEs predict that in increasing return sectors (IRSs), the larger region, relatively to the smaller region (Krugman, 1980): attracts a disproportionately larger share of firms in the IRS in relation to the share of demand it hosts (HME in the number of local firms); employs disproportionately more factors of production in relation to the share of demand it hosts (HME in factor employment); and runs a trade surplus in the IRS (HME in trade patterns). As a result, total agglomeration of the IRS emerges on the larger region when trade costs are sufficiently small (Krugman, 1991). In this paper we have tested the robustness of home market effects (HMEs) to one of the central assumptions of standard trade-geography models (Krugman, 1980, Krugman, 1991, Brander, 1981 and Ottaviano et al., 2002): exogenous costs of production. In particular, we have endogenized the costs of production as a result of firms’ R&D responses to market size differences.