Start-Up Entry Costs, Domestic Frictions and Regional Disparity in an Open Economy
SCID Working Paper 428
This paper examines how start-up entry costs aect regional income disparity by extending the Melitz (2003) model to incorporate both interregional and international trade. Our main insight is that gains from trade interact with interregional trade costs and start-up entry cost dierentials. Comparing with an autarky economy, regional disparity in an open economy resulting from start-up entry cost dierentials widens further if interregional trade costs are low, and shrinks when they are high. Moreover, regional disparity could follow an inverted-U shape when the home country increases in international trade exposure.