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Reallocation gains in a specific factors model with firm heterogeneity

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  • Eddy Bekkers
  • Robert Stehrer

Abstract

We study firm heterogeneity in a specific factors model to address the effect of factor mobility on reallocation gains from trade. A model is proposed with Melitz type firm heterogeneity with two sectors, two countries and two fixed factors and one factor mobile across sectors. Equilibrium in each sector can be concisely represented by a demand and supply equation and a FE and ZCP condition. Varying the substitution elasticity between the fixed and mobile factor we show that the welfare gains from trade liberalization are larger in countries with a lower substitution elasticity. Furthermore, it is shown that the immobile production factor in the comparative disadvantage sector can still gain from trade liberalization due to the reallocation effect.

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Bibliographic Info

Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2011-15.

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Length: 24 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:jku:econwp:2011_15

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Keywords: Firm heterogeneity; Specific Factors; Reallocation Gains from Trade;

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  1. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
  2. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-50, May.
  3. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  4. Erhan Artuc & Shubham Chaudhuri & John McLaren, 2007. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," NBER Working Papers 13465, National Bureau of Economic Research, Inc.
  5. Edward J. Balistreri & Russell H. Hillberry & Thomas F. Rutherford, 2009. "Trade and Welfare: Does Industrial Organization Matter?," CER-ETH Economics working paper series 09/119, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  6. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July.
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