We develop a multi-country Dixit-Stiglitz trade model and analyze how industry location and welfare respond to changes in: (i) transport frictions(e.g., infrastructure, transportation technology); and (ii) non-transport frictions (e.g., tariffs, standards and regulations). We show that changes in nontransport frictions, which are usually origin-destination specific, do not allow for any clear prediction as to changes in industry location and welfare; whereas changes in transport frictions, which are usually not origin-destination specific, may allow for such predictions. In particular, we show that reductions in transport frictions occurring at links around which the spatial network is locally a tree are Pareto welfare improving.
Published in 2007 in: Regional Science and Urban Economics, v. 37, 6, pp. 625-648
