Distorted Trade Barriers
AbstractSince firm heterogeneity has been introduced into international trade models, the importance of firm entry and exit (the extensive margin) has been highlighted. In fact, Chaney (2008) illustrates how accounting for this extensive margin and heterogenous firms alters the standard gravity equation; thereby reversing the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Furthermore, Cole (forthcoming) points out that ad valorem tariffs affect the extensive margin quite differently than the commonly used iceberg transport cost. In this paper, I show that the elasticity of trade flows with respect to tariffs is more elastic than that of iceberg transport costs. Thus, elasticity estimates derived from variables such as distance may underestimate the effect caused by a change in tariffs.
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Bibliographic InfoPaper provided by School Of Economics, University College Dublin in its series Working Papers with number 201105.
Length: 14 pages
Date of creation: 02 Feb 2011
Date of revision:
Intra-industry Trade; Gravity; Firm heterogeneity; Monopolistic competition;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-05 (All new papers)
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- Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013.
"Icebergs versus tariffs: A quantitative perspective on the gains from trade,"
University of Tuebingen Working Papers in Economics and Finance
53, University of Tuebingen, Faculty of Economics and Social Sciences.
- Gabriel J. Felbermayr & Benjamin Jung & Mario Larch, 2013. "Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade," CESifo Working Paper Series 4175, CESifo Group Munich.
- Prehn, Sören & Brümmer, Bernhard, 2011. "'Distorted gravity: The intensive and extensive margins of international trade' revisited ; an application to an intermediate Melitz model," DARE Discussion Papers 1109, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
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