Home market effect versus multinationals

We develop a model with two asymmetric countries. Firms choose the number andthe location of plants that they operate. The production of each firm increases whentrade costs fall. The fall also induces multinationals to repatriate their production intoa single country, which is likely to be the large country because of the home marketeffect. The net effect on total output is favorable in the large country and ambiguousin the small country. We extend the model to endogenize country sizes and we showthat in an equilibrium with multinationals only, a rent can be taxed by governments....