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 while the lowest productivity firms to move to the periphery. We also show that heterogeneity dampens the home market effect.

This paper develops a theoretical model of trade and environmental emissions with heterogeneous rms, where rms make abatement investments and thereby aect their level of emissions. We show that investments in abatement are positively related to rm productivity and rm exports, while emission intensity is negatively related to rms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, reduces emissions per output. We nd that trade liberalization weeds out the least productive and dirtiest rms thereby shifting production away from relatively dirty low productive local rms to more productive and cleaner exporters. The overall eect of trade is therefore to reduce emissions. We test the empirical implications of the model on emission intensity, abatement and exporting using rm-level data from Sweden. The empirical results support our model.

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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 while the lowest productivity firms to move to the periphery. We also show that heterogeneity dampens the home market effect.