Spatial Inequality, Globalization and Footloose Capital

Abstract

This paper revisits the home market effect (HME) without any homogeneous good by reconstructing the footloose capital model. This simple model analytically reproduces some typical results scattered in the existing literature, and also provides new insights. Firstly, we derive both spatial inequalities in industrial location and in income. They are the home market effect in terms of firm share and wage: the larger country has a more-than-proportionate share of firms and a higher wage. These two HMEs are shown to be equivalent. Secondly, both the wage differential and the industrial location in the larger country evolve in an inverted U-pattern when transport costs decline. Finally, we analytically examine the effects of trade liberalization on the welfare and show that both countries may gain from globalization.