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Firm Heterogeneity and Aggregate Welfare

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  • Marc J. Melitz

    (Department of Economics)

  • Stephen J. Redding

    (Princeton University)

Abstract

We examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. We consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, we show that the two models have di↵erent aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogeneous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, we find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade (as shown by Arkolakis, Costinot and Rodriguez-Clare, 2012); but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.

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Paper provided by Sciences Po Departement of Economics in its series Sciences Po Economics Discussion Papers with number 2013-11.

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Date of creation: Mar 2013
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Handle: RePEc:spo:wpecon:info:hdl:2441/7o52iohb7k6srk09n8t832o04

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Keywords: firm heterogeneity; welfare gains from trade;

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  1. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, 06.
  2. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September.
  3. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
  4. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers 433, Society for Economic Dynamics.
  5. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
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Cited by:
  1. Levchenko, Andrei A. & Zhang, Jing, 2014. "Ricardian productivity differences and the gains from trade," European Economic Review, Elsevier, vol. 65(C), pages 45-65.
  2. Nocco, Antonella & Ottaviano, Gianmarco & Salto, Matteo, 2013. "Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters," CEPR Discussion Papers 9417, C.E.P.R. Discussion Papers.
  3. Holger Breinlich & Gianmarco I. P. Ottaviano & Jonathan R. W. Temple, 2013. "Regional growth and regional decline," LSE Research Online Documents on Economics 51575, London School of Economics and Political Science, LSE Library.
  4. Arnaud Costinot & Dave Donaldson & Jonathan Vogel & Ivan Werning, 2013. "Comparative Advantage and Optimal Trade Policy," NBER Working Papers 19689, National Bureau of Economic Research, Inc.

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