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The selection effect of two-way trade in the Melitz model: an alternative approach

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  • Jacques Potin

    (Economics Department - ESSEC Business School)

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    Abstract

    This paper studies the influential Melitz model of trade with heterogeneous firms using an alternative, intuitive approach. Contrary to what is often argued, it is an increase in product market competition that drives the bad firms out: with two-way trade, entry by foreign firms is not compensated by a “sufficient” reduction in the mass of surviving firms. To illustrate this, we decompose the total effect of trade in two partial effects: a domesticprofit-reducing effect due to foreign market penetration by the most productive firms; an average-profitreducing effect due to the payment of the fixed export costs. We also provide the new prediction that trade generally leads to (weakly) less entry in the industry. This clarifies key interpretation issues in a prolific literature.

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    File URL: http://hal-essec.archives-ouvertes.fr/docs/00/55/47/24/PDF/09001_Potin.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00554724.

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    Date of creation: Apr 2009
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    Handle: RePEc:hal:journl:hal-00554724

    Note: View the original document on HAL open archive server: http://hal-essec.archives-ouvertes.fr/hal-00554724/en/
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    Related research

    Keywords: Firm Heterogeneity ; Intra-industry Trade ; Selection;

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    1. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2004. "The Paris Residential Market: Driving Factors and Market Behaviour 1973-2001," ESSEC Working Papers DR 04006, ESSEC Research Center, ESSEC Business School.
    2. Batista, Catia & Potin, Jacques, 2008. "International Specialization and the Return to Capital, 1976-2000," ESSEC Working Papers DR 08001, ESSEC Research Center, ESSEC Business School.
    3. Batista, Catia & Potin, Jacques, 2006. "Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995," ESSEC Working Papers DR 06008, ESSEC Research Center, ESSEC Business School.
    4. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2005. "A PCA Factor Repeat Sales Index (1973-2001) To Forecast Apartment Prices in Paris (France)," ESSEC Working Papers DR 05002, ESSEC Research Center, ESSEC Business School.
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