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 affect regional income disparity by extending the Melitz (2003) model to incorporate both inter-regional and international trade. Our main insight is that gains from trade interact with inter-regional trade costs and start-up entry cost differentials. Comparing with an autarky economy, regional disparity in an open economy resulting from start-up entry cost differentials widens further if inter-regional 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.