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International Trade with Indirect Additivity

Author

Listed:
  • Paolo Bertoletti
  • Federico Etro
  • Ina Simonovska

Abstract

We develop a general equilibrium model of trade that features "indirectly additive" preferences and heterogeneous firms. Monopolistic competition generates markups that are increasing in firm productivity and in destination country per capita income, but independent from destination population, as documented empirically. The gains from trade liberalization are lower than in models based on CES preferences, and the difference is governed by the average pass-through. When we calibrate the model so as to match observed pricing-to-market in micro-data, it generates welfare gains that are substantially lower than those predicted by commonly employed frameworks.

Suggested Citation

  • Paolo Bertoletti & Federico Etro & Ina Simonovska, 2018. "International Trade with Indirect Additivity," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 1-57, May.
  • Handle: RePEc:aea:aejmic:v:10:y:2018:i:2:p:1-57
    Note: DOI: 10.1257/mic.20160382
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    References listed on IDEAS

    as
    1. Etro Federico, 2010. "Endogenous Market Structures and International Trade," Working Papers 2010_26, Department of Economics, University of Venice "Ca' Foscari".
    2. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
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    Citations

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    Cited by:

    1. Feenstra, Robert C., 2018. "Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity," Journal of International Economics, Elsevier, vol. 110(C), pages 16-27.
    2. Lilia Cavallari & Federico Etro, 2017. "Demand, Markups and the Business Cycle. Bayesian Estimation and Quantitative Analysis in Closed and Open Economies," Working Papers 2017:09, Department of Economics, University of Venice "Ca' Foscari".
    3. Diez, Federico J. & Mora, Jesse & Spearot, Alan C., 2016. "Firms in international trade," Working Papers 16-25, Federal Reserve Bank of Boston.
    4. Dhingra, Swati & Morrow, John, 2017. "Efficiency in large markets with firm heterogeneity," Research in Economics, Elsevier, vol. 71(4), pages 718-728.
    5. Bastos, Paulo & Silva, Joana, 2010. "The quality of a firm's exports: Where you export to matters," Journal of International Economics, Elsevier, vol. 82(2), pages 99-111, November.
    6. Ciani, Andrea, 2017. "Income inequality and the quality of imports," DICE Discussion Papers 245, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    7. Nelson Lind & Natalia Ramondo, 2018. "Trade with Correlation," NBER Working Papers 24380, National Bureau of Economic Research, Inc.
    8. Etro, Federico, 2017. "The Heckscher–Ohlin model with monopolistic competition and general preferences," Economics Letters, Elsevier, vol. 158(C), pages 26-29.
    9. Thibault Fally, 2018. "Integrability and Generalized Separability," NBER Working Papers 25025, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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