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Efficiency Gaps, Love of Variety and International Trade

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Montagna, Catia

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Abstract

We develop a general equilibrium monopolistic competition model of trade with technical heterogeneity among firms and countries. With free entry, technical asymmetries between firms result in the endogenous determination of the equilibrium average efficiency of the industry. We show that trade reduces (increases) the minimum efficiency required to survive in the more (less) efficient country. This has important welfare implications: (1) Contrary to the constant elasticity of substitution homogeneous-firms model, trade affects welfare even when there is no love of variety. (2) There are circumstances in which trade liberalization leads to a loss of consumer welfare. Copyright 2001 by The London School of Economics and Political Science

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 68 (2001)
Issue (Month): 269 (February)
Pages: 27-44
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Handle: RePEc:bla:econom:v:68:y:2001:i:269:p:27-44

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  1. Simona Rasciute & Eric J. Pentecost, 2008. "The Location of Foreign Direct Investment in the Central and Eastern European Countries: A Mixed Logit and Multilevel Data Approach," Discussion Paper Series 2008_04, Department of Economics, Loughborough University, revised Jul 2008. [Downloadable!]
  2. Richard E. Baldwin & Rikard Forslid, 2006. "Trade Liberalization with Heterogenous Firms," NBER Working Papers 12192, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Jan G. Jorgensen & Philipp J. H. Schröder, 2005. "Tariffs and Firm-Level Heterogeneous Fixed Export Costs," Discussion Papers of DIW Berlin 496, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
  4. Crt Kostevc, 2005. "Performance of Exporters: Scale Effects or Continuous Productivity Improvements," LICOS Discussion Papers 15905, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  5. Hansen, Jørgen Drud & Kvedaras, Virmantas & Nielsen, Jørgen Ulff-Møller, 2008. "Monopolistic Competition, International Trade and Firm Heterogeneity - a Life Cycle Perspective," Working Papers 08-7, University of Aarhus, Aarhus School of Business, Department of Economics. [Downloadable!]
  6. Spiros Bougheas & Holger Görg, 2008. "Organizational forms for global engagement of firms," Kiel Working Papers 1448, Kiel Institute for the World Economy. [Downloadable!]
  7. Joze P. Damijan & Crt Kostevc, 2005. "Performance on Exports: Continuous Productivity Improvements or Capacity Utilization," LICOS Discussion Papers 16305, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  8. Sebastien Jean, 2000. "International Trade and Firms' Heterogeneity Under Monopolistic Competition," Working Papers 2000-13, CEPII research center. [Downloadable!]
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  9. Philipp J.H. Schröeder & Allan Sørensen, 2009. "Second Thoughts on Exporter Productivity," Economics Working Papers 2009-03, School of Economics and Management, University of Aarhus. [Downloadable!]
  10. Hartmut Egger & Udo Kreickemeier, 2007. "Firm Heterogeneity and the Labour Market Effects of Trade Liberalisation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  11. Schröder, Philipp J.H. & Jørgensen, Jan G., 2007. "Fixed Export Cost heterogeneity, Trade and Welfare," MPRA Paper 7397, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  12. Richard Baldwin, 2005. "Heterogeneous Firms and Trade: Testable and Untestable Properties of the Melitz Model," NBER Working Papers 11471, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Zhihao Yu, 2002. "Entrepreneurship and intra-industry trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(2), pages 277-290, June. [Downloadable!] (restricted)
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