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ABSTRACT We examine the organization and location choice of heterogeneous firms in a two-region economy. When some high-productivity firms engage in multiplant production, a reduction in transport costs causes two changes in a small region: the closure of plants by high-productivity multiplant firms and the relocation of low-productivity single-plant firms to the region. In the presence of high-productivity multiplant firms, therefore, a decline in transport costs reinforces the spatial sorting of firms by productivity, enlarging the productivity gap between large and small regions. Conversely, reducing investment costs weakens the spatial sorting effects on regional productivity disparities. [ABSTRACT FROM AUTHOR]

We investigate how cross-country differences in firms' fixed set-up costs affect the trade-off between global efficiency and spatial equity. Our analysis reveals that the standard assumption of symmetry in set-up costs masks the existence of an interesting effect: the range of available varieties depends on the spatial distribution of firms. In such a setting, where the market outcome leads to excessive agglomeration in the symmetric case, a planner may opt for asymmetric set-up costs and even more agglomeration. We show that the planner will always favor lower set-up costs in the large country with more agglomeration when the consumer's marginal preference for variety is high, or with less agglomeration when the consumer's marginal preference for variety is low. [ABSTRACT FROM AUTHOR]