Firm Heterogeneity, Asymmetric Cost and Regional Disparity

SCID Working Paper 428



This paper explores the e ects of international trade with the rest of the world on Chinese regional income disparity within the standard model of product di erentiation and heterogeneity in rm productivities. Other things equal, the di erence of entry cost results income disparity between regions in both autarky and open economy. When domestic intraregional transport cost between regions is relative low, the same amount of entry cost di erence results a wider regional income gap in open economy than that of autarky; and the openness in terms of export over aggregate revenue in the region with a relative lower entry cost is larger than that of the region with a higher entry cost. The extension of di erent international transportation costs does not change the basic results but exacerbate the productivity disparity between two regions. These results match the facts in Chinese economy well.

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