IDEAS home Printed from https://ideas.repec.org/a/eee/inecon/v78y2009i1p100-112.html
   My bibliography  Save this article

Trade policy under firm-level heterogeneity in a small economy

Author

Listed:
  • Demidova, Svetlana
  • Rodríguez-Clare, Andrés

Abstract

We explore the effect of trade policy on productivity and welfare in the now standard model of firm-level heterogeneity and product differentiation with monopolistic competition. To obtain sharp results, we restrict attention to an economy that takes as given the price of imports and the demand schedules for its exports (a "small economy"). We first establish that welfare can be decomposed into four terms: productivity, terms of trade, variety and curvature, where the last is a term that captures heterogeneity across varieties. We then show how a consumption subsidy, an export tax, or an import tariff allows our small economy to deal with two distortions that we identify and thereby reach its first-best allocation. We also show that an export subsidy generates an increase in productivity, but given the negative joint effect on the other three terms (terms of trade, variety, and curvature), welfare falls. In contrast, an import tariff improves welfare in spite of the fact that productivity falls.

Suggested Citation

  • Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
  • Handle: RePEc:eee:inecon:v:78:y:2009:i:1:p:100-112
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022-1996(09)00026-9
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    2. Richard E. Baldwin & Rikard Forslid, 2010. "Trade Liberalization with Heterogeneous Firms," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 161-176, May.
    3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    4. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-450, May.
    5. Marc Melitz & Ghironi, Fabio & Florin Bilbiie, 2006. "Monopoly Power and Endogenous Variety in Dynamic Stochastic General Equilibrium: Distortions and Remedies," Working Paper 14401, Harvard University OpenScholar.
    6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    7. Helpman, Elhanan, 1989. "Monopolistic Competition in Trade Theory," Foerder Institute for Economic Research Working Papers 275470, Tel-Aviv University > Foerder Institute for Economic Research.
    8. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
    9. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    2. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Journal of International Economics, Elsevier, vol. 89(1), pages 13-25.
    3. 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.
    4. Alessandria, George & Choi, Horag, 2014. "Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization," Journal of International Economics, Elsevier, vol. 94(2), pages 207-223.
    5. Pflüger, Michael & Suedekum, Jens, 2013. "Subsidizing firm entry in open economies," Journal of Public Economics, Elsevier, vol. 97(C), pages 258-271.
    6. Lukas Mohler & Michael Seitz, 2012. "The gains from variety in the European Union," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(3), pages 475-500, September.
    7. Michael Pflüger & Stephan Russek, 2014. "Trade and Industrial Policies with Heterogeneous Firms: The Role of Country Asymmetries," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 170-188, February.
    8. Lewrick, Ulf & Mohler, Lukas & Weder, Rolf, 2011. "International Trade in Variety and Domestic Production," Working papers 2011/03, Faculty of Business and Economics - University of Basel.
    9. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2007. "Productivity, terms of trade and the `home market effect'," Journal of International Economics, Elsevier, vol. 73(1), pages 99-127, September.
    10. Paul S. Segerstrom & Ignat Stepanok, 2018. "Learning How To Export," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(1), pages 63-92, January.
    11. Stefano Bolatto & Massimo Sbracia, 2016. "Deconstructing the Gains from Trade: Selection of Industries vs Reallocation of Workers," Review of International Economics, Wiley Blackwell, vol. 24(2), pages 344-363, May.
    12. Ardelean, Adina & Lugovskyy, Volodymyr, 2010. "Domestic productivity and variety gains from trade," Journal of International Economics, Elsevier, vol. 80(2), pages 280-291, March.
    13. Olivier Cadot & Céline Carrère & Vanessa Strauss-Kahn, 2013. "Trade Diversification, Income, And Growth: What Do We Know?," Journal of Economic Surveys, Wiley Blackwell, vol. 27(4), pages 790-812, September.
    14. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    15. Felbermayr, Gabriel & Prat, Julien & Schmerer, Hans-Jörg, 2011. "Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity," Journal of Economic Theory, Elsevier, vol. 146(1), pages 39-73, January.
    16. Flora Bellone & Sarah Guillou & Lionel Nesta, 2009. "Are Export Premia Robust to Innovation Statistics ?," Documents de Travail de l'OFCE 2009-15, Observatoire Francais des Conjonctures Economiques (OFCE).
    17. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2019. "Geography, competition, and optimal multilateral trade policy," Journal of International Economics, Elsevier, vol. 120(C), pages 145-161.
    18. Baldwin, Richard E. & Robert-Nicoud, Frederic, 2008. "Trade and growth with heterogeneous firms," Journal of International Economics, Elsevier, vol. 74(1), pages 21-34, January.
    19. Fernandes,Ana Margarida & Klenow,Peter J. & Meleshchuk,Sergii & Pierola,Martha Denisse & Rodriguez-Clare,Andres, 2018. "The Intensive Margin in Trade," Policy Research Working Paper Series 8625, The World Bank.
    20. Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Südekum, 2014. "Trade, Wages, And Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(4), pages 1305-1348, November.

    More about this item

    Keywords

    Trade policies Firm heterogeneity;

    JEL classification:

    • F1 - International Economics - - Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:78:y:2009:i:1:p:100-112. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/505552 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505552 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.