Does lumpiness matter in an open economy?: Studying international economics with regional data

Abstract

This paper addresses the empirical question whether the regional distribution of production factors within countries is ever so uneven that it triggers specialization of production that makes regions produce different sets of goods at different factor prices. Due to the different welfare effects of trade policy in a country with regional specialization, this is an important question. In addition, it is a question about the legitimacy of treating a country as a relatively homogenous unit. In answering these questions, I implement the concept of “lumpiness” as introduced by Courant and Deardorff [J. Polit. Econ. 100 (1992) 198]. I find that lumpiness or an uneven regional distribution of production factors that induces intranational specialization and different regional factor prices is not an issue for Japan, the United Kingdom and maybe not even for India.