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Innovation, firm size distribution, and gains from trade

Author

Listed:
  • Chen, Yi-Fan

    (National University of Kaohsiung)

  • Hsu, Wen-Tai

    (Institute of Economics, Academia Sinica)

  • Peng, Shin-Kun

    (Institute of Economics, Academia Sinica)

Abstract

Power laws in productivity and firm size are well-documented empirical regularities. As they are upper right-tail phenomena, this paper shows that assuming asymptotic power functions for various model primitives (such as demand and firm heterogeneity) are sufficient for matching these regularities. This greatly relaxes the functional-form restrictions in economic modeling and can be beneficial in certain contexts. We demonstrate this in a modified Melitz (2003) model which embeds an innovation mechanism in order to endogenize the productivity distribution and generate both of the above-mentioned power laws. We also investigate the model's welfare implications with regard to innovation by conducting a quantitative analysis of the welfare gains from trade.

Suggested Citation

  • Chen, Yi-Fan & Hsu, Wen-Tai & Peng, Shin-Kun, 2023. "Innovation, firm size distribution, and gains from trade," Theoretical Economics, Econometric Society, vol. 18(1), January.
    • Handle: RePEc:the:publsh:4152
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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