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Welfare Effects of Trade Liberalization with Intra-industry Reallocations: The Importance of Preferences and Market Failures

Listed author(s):
  • Allan Sørensen

    ()

    (School of Economics and Management, Aarhus University, Denmark)

This paper shows that the novel gains from trade liberalization driven by intra-industry reallocations (Melitz (2003)) are not robust to changes in the preference structure. In the Melitz (2003) setting the unambigousness of the welfare effect depends crucially on the assumption of traditional CES pref- erences, which ensures equivalence of the market equilibrium and the social planner solution. For other preferences this equivalence is broken and trade liberalization may reduce welfare by magnifying market failures. An exact condition for trade liberalization to reduce overall welfare is derived under the assumptions of generalized CES preferences and a specific distribution (Pareto) of firm heterogeneity.

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File URL: ftp://ftp.econ.au.dk/afn/wp/10/wp10_02.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2010-02.

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Length: 24
Date of creation: 14 Jan 2010
Handle: RePEc:aah:aarhec:2010-02
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Felbermayr, Gabriel & Prat, Julien, 2011. "Product market regulation, Firm Selection, and Unemployment," Munich Reprints in Economics 20593, University of Munich, Department of Economics.
  2. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers.
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  4. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
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