Globalization, Regional Productivity, Taste Bias and Internal Spatial Distribution

I consider an integrated model consisting of a system of two symmetric regions and the rest of the world that features 1) globalization, 2) regional heterogeneity in productivity, and 3) taste bias over domestic and foreign goods as key determinants of spatial agglomeration. I show that falling external trade barriers favor internal agglomeration. Moreover, a reduction in relative productivity compensates for the trade barriers between the two symmetric regions and the rest of the world; this also favors internal agglomeration of the mobile factor. In addition, I consider two cases of taste bias namely ethnocentrism and xenocentrism. I find that a shift of consumer preferences in the two symmetric regions with respect to goods that are made in the rest of the world results in internal agglomeration, too. Finally, a shift of consumer preferences in a region with respect to goods that are made in the other region results 1) in internal agglomeration under ethnocentrism, and 2) in internal dispersion under xenocentrism.