Abhatoo - Centre Nationale de Documentation

This paper compares two policies: trade cost reduction and .rm relocation cost reduction using a three-country version of a heterogeneous-.rms economic geography model, where the three countries have di¤erent market (population) size. We show how the e¤ects of the two policies di¤er, in particular, for the country of intermediate size. Unless the intermediate country is very small, it will gain industry when relocation costs are reduced, but lose industry when trade costs are reduced. The smallest country loses industry in both cases, but only experiences lower welfare in the case of lower relocation costs. Thus, the ranking of the policies from the point of view of the two small and intermediate countries tends to be the opposite.