The Home Market Effect in a Home Biased Geography

In the presence of scale economies, industries are incentivized to localize production. Geography is key in determining where that localization happens. The Home Market Effect (HME) predicts that locations with the largest demand are the host. Yet, since its origin by Krugman (1980), the prediction has only been shown to hold in two location models, therefore questioning its generality and empirical relevance. I prove the sharp theoretical bounds of a HME in an arbitrary geography, and offer a theoretically consistent interpretation using home bias. Intuitively, without home bias, consumers don’t buy locally; production is therefore not incentivized to localize near them