Welfare enhancing uncertainty

In this paper it is shown that one of the intrinsic characteristics of the canonical Melitz (2003) type framework is that inclusion of further uncertainties enhances the aggregate welfare of the given economy, though reducing the total varieties available. Here the uncertainty assumed is, payment risk associated with the exchange in international market. The key to such an occurrence is the fact that uncertainty acts like an increased trade costs leading to added exit of low productive firms. Since uncertainty seems to be desirable any efforts to decrease such can be deemed expensive. However, this also proves for a fact that the developing countries with overall lower productivity and higher uncertainty will lose out its import and export share to international competition in the global market.