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Trade Liberalization, Firm Selection, and Variety Growth

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  • Itai Agur

Abstract

Recent empirical findings indicate that when trade is liberalized both firm selection takes place and product variety increases. Each of these two stylized facts has its own seminal theory. But how can they arise together? This paper presents a model of heterogeneous, multi‐variety firms that provides an intuitive explanation. When trade is liberalized efficient foreign exporters enter and push out the least efficient domestic firms. Fewer firms remain in total. But exporters endogenously offer more variety than domestic firms. The entry of variety‐rich foreign firms unambiguously dominates the decrease in the number of firms. Thus, total variety increases.

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  • Itai Agur, 2010. "Trade Liberalization, Firm Selection, and Variety Growth," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 582-594, August.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:3:p:582-594
    DOI: 10.1111/j.1467-9396.2010.00886.x
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    References listed on IDEAS

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    Cited by:

    1. Colin J. Hottman & Stephen J. Redding & David E. Weinstein, 2016. "Quantifying the Sources of Firm Heterogeneity," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1291-1364.
    2. Erasmus K. Kersting, 2013. "International Organization of Production with Heterogeneous Firms," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 585-599, August.
    3. Hottman, Colin & Redding, Stephen & Weinstein, David E., 2014. "What is 'firm heterogeneity' in trade models? The role of quality, scope, markups and cost," LSE Research Online Documents on Economics 60448, London School of Economics and Political Science, LSE Library.
    4. Paul De Grauwe & Zhaoyong Zhang & Filip Abraham & Jan Van Hove & Zuzanna Studnicka, 2016. "David vs. Goliath? Smaller European Exporting firms facing Asian competition on global markets," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(1), pages 18-40, February.

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