Trade and location with land as a productive factor§

This paper studies the role of land as a factor of production in a simple monopolistic competition model of trade and geography. Overall we find that land for production is a powerful dispersion force. More specifically, we show that, in contrast to the new trade literature, a larger country will have lower wages, in general. Moreover, allowing for labor mobility, we show that agglomeration is more likely to occur when the elasticity of substitution among varieties is small, hence, when the market power of firms is strong. Furthermore, the relationship between the level of trade freeness where symmetry is broken and the elasticity of substitution is inverse to the usual finding in the literature. In stark contrast to analyses where land is used for housing, only, the market equilibrium delivers excessive agglomeration in our model. JEL-Classification: [F12, F22, R12]