Working Paper

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