Endogenous transport costs and firm agglomeration in new trade theory.

Departing from the exogenous treatment of transport costs, this study examines endogenous transport costs and their impact on firm location in new trade theory. Previous studies argue that, if exogenous transport costs in a large country are sufficiently higher than in a small country, then the home market effect disappears. In our model, national governments control domestic transport costs via public infrastructure investment. Our study presents persuasive findings that a large country always collects more tax revenue for public investment than a small country, which results in lower domestic transport costs, and hence, the home market effect always prevails. [ABSTRACT FROM AUTHOR]