Which Firms Are Left in the Periphery? Spatial Sorting of Heterogeneous Firms With Scale Economies in Transportation

This paper introduces scale economies in transportation in a trade and geography model with heterogeneous firms. This relatively small change to the standard model produces a new pattern of spatial sorting among firms. In contrast to the existing literature, our model produces the result that firms of intermediate productivity relocate to the large core region, whereas high‐ and low‐productivity firms remain in the periphery. Trade liberalization leads to a gradual relocation to the core with the most productive firms remaining in the periphery.