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Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?

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  • Raphael Anton Auer

Abstract

While it is well established that across-country taste differences are associated with "home market effects", there is very limited analysis of how such preference heterogeneity impacts the aggregate volume of trade and the welfare gains from liberalization. I develop a structural model of aggregate demand featuring products with heterogeneous attributes, consumers with heterogeneous tastes for attributes, and across-country differences in the distribution of tastes. The impact of across-country taste differences depends on whether the domestic industry can adjust to the mismatch between the attribute composition of imports and the domestic distribution of tastes. For the case of a large degree of across-country taste differences, countries specialize completely and the model supports notions along the lines of Linder (1961) that taste diversity impedes the volume of trade and leads to group-specific gains from trade. In contrast, if specialization is incomplete, free firm entry implies that the relative toughness of competition across different market segments must be invariant to liberalization. It is shown that therefore, both trade volume and welfare gains are entirely unaffected by the distribution of foreign tastes and coincide with those in a representative agent framework.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2010-13.

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Length: 43 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:snb:snbwpa:2010-13

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Keywords: Intra-Industry Trade; Monopolistic Competition; Heterogeneous Agents; Industrial Structure; Firm Dynamics;

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References

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  1. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  2. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," NBER Working Papers 9076, National Bureau of Economic Research, Inc.
  3. Raphael Auer & Thomas Chaney, 2009. "Exchange rate pass-through in a competitive model of pricing-to-market," Globalization and Monetary Policy Institute Working Paper 23, Federal Reserve Bank of Dallas.
  4. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  5. Alejandro Cuñat & Marco Maffezzoli, 2005. "Can Comparative Advantage Explain the Growth of US Trade?," CEP Discussion Papers dp0669, Centre for Economic Performance, LSE.
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  7. Acemoglu, D. & Zilibotti, F., 1998. "Productivity Differences," Papers 660, Stockholm - International Economic Studies.
  8. Matthieu Crozet & Federico Trionfetti, 2007. "Trade Costs and the Home Market Effect," Working Papers 2007-05, CEPII research center.
  9. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May.
  10. Atkin, David, 2010. "Trade, Tastes and Nutrition in India," Working Papers 80, Yale University, Department of Economics.
  11. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2006. "Multi-Product Firms and Trade Liberalization," NBER Working Papers 12782, National Bureau of Economic Research, Inc.
  12. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
  13. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers 433, Society for Economic Dynamics.
  14. Goldberg, Pinelopi Koujianou & Verboven, Frank, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Wiley Blackwell, vol. 68(4), pages 811-48, October.
  15. Matthieu Crozet & Keith Head & Thierry Mayer, 2009. "Quality sorting and trade: Firm-level evidence for French wine," Sciences Po publications 7295, Sciences Po.
  16. Timothy J. Kehoe & Kim J. Ruhl, 2013. "How Important Is the New Goods Margin in International Trade?," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 358 - 392.
  17. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
  18. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
  19. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  20. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
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Citations

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Cited by:
  1. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721 - 765.
  2. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.

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