Sorting, Displacement, and the Limited Welfare Benefits of Non-Local Firm
Abstract: How much do consumers in a city benefit from the presence of local-service firms originating in other cities? While establishments of non-local firms are typically larger and likely more productive than their local counterparts, their net welfare benefits can be more limited due to two reasons. First, consumption in these industries is highly localized, and non-local firms may appear larger partly because they sort into high-demand locations. Second, non-local firms displace local firms to locations with lower demand, reducing consumer access to the displaced firms. Motivated by these patterns, I develop a quantitative spatial model that features the sorting of firms to heterogeneous locations within a city, where they compete for a limited supply of commercial floor space. Calibrating the model to a selected set of U.S. commuting zones, I find that the presence of non-local firms increases local consumer welfare by less than 1% on average. This estimate is significantly smaller than the gains predicted by an alternative model that abstracts from the sorting and displacement of firms across locations. A decomposition of the welfare effects reveals that this modest impact is driven by a strong displacement channel.
Recommended citation: Lin, Feng. "Sorting, Displacement, and the Limited Welfare Benefits of Non-Local Firms." 2025.
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