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Trade policy under firm-level heterogeneity in a small economy

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Author Info
Demidova, Svetlana
Rodríguez-Clare, Andrés

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Abstract

We explore the effect of trade policy on productivity and welfare in the now standard model of firm-level heterogeneity and product differentiation with monopolistic competition. To obtain sharp results, we restrict attention to an economy that takes as given the price of imports and the demand schedules for its exports (a "small economy"). We first establish that welfare can be decomposed into four terms: productivity, terms of trade, variety and curvature, where the last is a term that captures heterogeneity across varieties. We then show how a consumption subsidy, an export tax, or an import tariff allows our small economy to deal with two distortions that we identify and thereby reach its first-best allocation. We also show that an export subsidy generates an increase in productivity, but given the negative joint effect on the other three terms (terms of trade, variety, and curvature), welfare falls. In contrast, an import tariff improves welfare in spite of the fact that productivity falls.

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Publisher Info
Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 78 (2009)
Issue (Month): 1 (June)
Pages: 100-112
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Handle: RePEc:eee:inecon:v:78:y:2009:i:1:p:100-112

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Trade policies Firm heterogeneity;

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References listed on IDEAS
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  1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September. [Downloadable!]
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  2. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andrés Rodríguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," NBER Working Papers 13933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Jozef Konings & Hylke Vandenbussche, 2009. "Antidumping Protection hurts Exporters:Firm-level evidence from France," LICOS Discussion Papers 24109, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
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  3. Huasheng Song & Hylke Vandenbussche, 2008. "Trade Policy and Innovation," LICOS Discussion Papers 20008, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  4. Finicelli, Andrea & Pagano, Patrizio & Sbracia, Massimo, 2009. "Ricardian selection," MPRA Paper 16950, University Library of Munich, Germany. [Downloadable!]
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