Cities, Heterogeneous Firms and Trade

Abstract

We document a novel stylized fact: Using data for several countries, we show that export activity is disproportionately concentrated in larger cities -- even more so than overall economic activity. We account for this fact by marrying elements of international trade and economic geography. We extend a standard Quantitative Spatial Economics (QSE) model to include heterogeneous firms that engage in selection along two margins: Entry into cities of heterogeneous productivity and entry into exporting.

The model allows us to study the implications of trade policy for within-country economic geography and of geographic policies for international trade. Our model delivers novel predictions for the bi-directional interactions between trade and urban dynamics: On the one hand, trade liberalization shifts employment towards larger cities, and on the other hand, liberalizing land use increases international trade integration.

We structurally estimate the model using data for the universe of Chinese and French manufacturing firms.