DP1961 | The International Division of Industries: Clustering and Comparative Advantage in a Multi-Industry Model


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We consider a model with a continuum of industries in which agglomeration forces cause each industry to concentrate in a single country. We study the division of industries between countries and show that this division is not unique, so that even with identical countries and symmetric industries the number of industries in each country need not be equal. Unequal divisions are sustainable as equilibria, even though they imply different wages in the two countries, and we find the bounds on the set of equilibrium divisions. With Ricardian differences in technology, there are equilibria in which industries operate in the country in which they have a comparative disadvantage. In both cases, a country may gain by using policy to grab a higher proportion of world industry.