Advanced Search
MyIDEAS: Login to save this paper or follow this series

Firm Entry, Trade, and Welfare in Zipf's World

Contents:

Author Info

  • Julian di Giovanni
  • Andrei A. Levchenko

Abstract

Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of economic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade calibrated to the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade -- newly imported goods -- is negligible. The extensive margin of imports accounts for only about 5.2% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, infra-marginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in fixed entry barriers are an order of magnitude larger, while the gains from a reduction in variable trade costs are an order of magnitude smaller.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w16313.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16313.

as in new window
Length:
Date of creation: Aug 2010
Date of revision:
Publication status: published as di Giovanni, Julian & Levchenko, Andrei A., 2013. "Firm entry, trade, and welfare in Zipf's world," Journal of International Economics, Elsevier, vol. 89(2), pages 283-296.
Handle: RePEc:nbr:nberwo:16313

Note: IFM ITI
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
  2. World Bank, 2007. "World Development Indicators 2007," World Bank Publications, The World Bank, number 8150.
  3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  4. Bekkers, Eddy & Francois, Joseph, 2008. "Heterogeneous Firms, the Structure of Industry, and Trade under Oligopoly," CEPR Discussion Papers 6956, C.E.P.R. Discussion Papers.
  5. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, Firm Dynamics, and International Trade," Working Papers WP13_2007_10, Laboratory for Macroeconomic Analysis.
  6. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau.
  7. Bernard, Andrew & Jensen, J Bradford & Redding, Stephen J & Schott, Peter, 2007. "Firms in International Trade," CEPR Discussion Papers 6277, C.E.P.R. Discussion Papers.
  8. 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.
  9. di Giovanni, Julian & Levchenko, Andrei A. & Rancière, Romain, 2010. "Power Laws in Firm Size and Openness to Trade: Measurement and Implications," CEPR Discussion Papers 7773, C.E.P.R. Discussion Papers.
  10. Christian Broda & David Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
  11. Costinot, Arnaud, 2007. "On the Origins of Comparative Advantage," University of California at San Diego, Economics Working Paper Series qt07g7g8h8, Department of Economics, UC San Diego.
  12. Charles I. Jones, 2008. "Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development," NBER Working Papers 13834, National Bureau of Economic Research, Inc.
  13. Xavier Gabaix, 2008. "Power Laws in Economics and Finance," NBER Working Papers 14299, National Bureau of Economic Research, Inc.
  14. Eddy Bekkers & Joseph Francis Francois, 2008. "Heterogeneous Firms, the Structure of Industry & Trade under Oligopoly," Economics working papers 2008-11, Department of Economics, Johannes Kepler University Linz, Austria.
  15. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc.
  16. Djankov, Simeon & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001. "The Regulation of Entry," Working Paper Series rwp01-015, Harvard University, John F. Kennedy School of Government.
  17. Mary Amiti, 2000. "Trade Liberalisation of Intermediate Inputs," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(4), pages 299-302.
  18. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2008. "An Anatomy of International Trade: Evidence from French Firms," NBER Working Papers 14610, National Bureau of Economic Research, Inc.
  19. Robert C. Feenstra, 2009. "Measuring the Gains from Trade under Monopolistic Competition," NBER Working Papers 15593, National Bureau of Economic Research, Inc.
  20. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  21. Jeroen Hinloopen & Charles van Marrewijk, 2006. "Comparative Advantage, the Rank-size Rule, and Zipf's Law," Tinbergen Institute Discussion Papers 06-100/1, Tinbergen Institute.
  22. Hiroyuki Kasahara & Joel Rodrigue, 2005. "Does the Use of Imported Intermediates Increase Productivity? Plant-Level Evidence," University of Western Ontario, Economic Policy Research Institute Working Papers 20057, University of Western Ontario, Economic Policy Research Institute.
  23. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
  24. Julian di Giovanni & Andrei A. Levchenko, 2011. "Country Size, International Trade, and Aggregate Fluctuations in Granular Economies," NBER Working Papers 17335, National Bureau of Economic Research, Inc.
  25. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  26. Gabaix, Xavier & Ibragimov, Rustam, 2011. "Rank − 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 24-39.
  27. repec:dgr:uvatin:2006100 is not listed on IDEAS
  28. Pinelopi Koujianou Goldberg & Amit Kumar Khandelwal & Nina Pavcnik & Petia Topalova, 2010. "Imported Intermediate Inputs and Domestic Product Growth: Evidence from India," The Quarterly Journal of Economics, MIT Press, vol. 125(4), pages 1727-1767, November.
  29. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  30. Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
  31. Julian di Giovanni & Andrei A. Levchenko, 2010. "Firm Entry, Trade, and Welfare in Zipf's World," NBER Working Papers 16313, National Bureau of Economic Research, Inc.
  32. Pinelopi Goldberg & Amit Khandelwal & Nina Pavcnik & Petia Topalova, 2009. "Trade Liberalization and New Imported Inputs," American Economic Review, American Economic Association, vol. 99(2), pages 494-500, May.
  33. Fujiwara, Yoshi & Aoyama, Hideaki & Di Guilmi, Corrado & Souma, Wataru & Gallegati, Mauro, 2004. "Gibrat and Pareto–Zipf revisited with European firms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 112-116.
  34. László Halpern & Miklós Koren & Adam Szeidl, 2011. "Imported Inputs and Productivity," CeFiG Working Papers 8, Center for Firms in the Global Economy, revised 16 Sep 2011.
  35. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  36. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08.
  37. Okuyama, K & Takayasu, M & Takayasu, H, 1999. "Zipf's law in income distribution of companies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 125-131.
  38. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  39. J. Peter Neary, 2010. "Two and a Half Theories of Trade †," The World Economy, Wiley Blackwell, vol. 33(1), pages 1-19, 01.
  40. Michael E. Waugh, 2009. "International trade and income differences," Staff Report 435, Federal Reserve Bank of Minneapolis.
  41. Easterly, William & Reshef, Ariell & Schwenkenberg, Julia, 2009. "The power of exports," Policy Research Working Paper Series 5081, The World Bank.
  42. Jonathan Eaton & Samuel S. Kortum & Sebastian Sotelo, 2012. "International Trade: Linking Micro and Macro," NBER Working Papers 17864, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16313. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.