Selection Effects with Heterogeneous Firms
We provide a general characterization of which firms will select alternative ways of serving a market. If and only if firms' maximum profits are supermodular in production and market-access costs, more efficient firms will select into the activity with lower market-access costs. Our result applies in a range of models and under a variety of assumptions about market structure. We show that supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.
Part of the series
- Department of Economics Discussion Paper Series (Ref: 588 )
Keywords: Foreign direct investment (FDI), Heterogeneous firms, Proximity-concentration trade-off, R&D with threshold effects, Super- and sub-convexity, Supermodularity