A footloose entrepreneur model with productivity heterogeneity in two regions

Abstract

This article introduces the productivity heterogeneity of Melitz, M. J. (2003). Econometrica, 71(6), 1695–1725 into the footloose entrepreneur model of Forslid, R., and Ottaviano, G. I. (2003). Journal of Economic Geography, 3(3), 229–240 to explore the industrial spatial distribution between two regions. We suggest a negative relationship between the shape parameter of the Pareto distribution and the share of skilled workers in a region. It enhances the escape competition effect to avoid agglomeration when the share of skilled workers in a region increases to generate intensified competition. This effect allows the equal distribution outcome to be sustained for a larger range of transport costs.