Firms' location Under taste and demand heterogeneity

In this paper we build a quality-augmented version of an economic geography model whereconsumers have heterogenous tastes for a set of manufacturing varieties. We discuss afootloose capital model and a footloose entrepreneur model. We show that firms selling thegoods with higher values select the region hosting the largest number of consumers. Largercountries thus get better access to the higher quality products. We also show that the effectof spatial selection on firms' spatial distribution crucially depends on the properties of thetaste distribution across varieties. Finally, we show that taste heterogeneity smooths theagglomeration patterns but that it should be considered neither as a dispersion force nor asan agglomeration force. Indeed, the introduction of taste heterogeneity makes an initiallydispersed economy less dispersed and an initially agglomerated economy lessagglomerated....