Home market effect, land rent, and welfare

This paper develops a general-equilibrium model which features the Home Market Effect and land use for production in the sector of increasing returns to scale. The land rent in the larger region is higher. Meanwhile, the larger region holds a more-than-proportionate share of firms, the so called HME in terms of firm share. These two aspects of spatial inequalities are shown to be equivalent. Moreover, the industrial distribution in the larger region and the land rent differential form bell-shaped patterns in economic integration. We demonstrate that the welfare in the larger region is higher and both regions may benefit from trade liberalization.