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Firm Heterogeneity and Aggregate Welfare

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  • Melitz, Marc J
  • Redding, Stephen J.

Abstract

We examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. We consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, we show that the two models have diff erent aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogeneous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, we find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade (as shown by Arkolakis, Costinot and Rodriguez-Clare, 2012); but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.

Suggested Citation

  • Melitz, Marc J & Redding, Stephen J., 2013. "Firm Heterogeneity and Aggregate Welfare," CEPR Discussion Papers 9405, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9405
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    References listed on IDEAS

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    1. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, June.
    2. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, May.
    3. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
    4. 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.
    5. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    6. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-564, September.
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    Cited by:

    1. Elhanan Helpman, 2014. "Foreign Trade and Investment: Firm-level Perspectives," Economica, London School of Economics and Political Science, vol. 81(321), pages 1-14, January.
    2. Breinlich, Holger & Ottaviano, Gianmarco I.P. & Temple, Jonathan R.W., 2014. "Regional Growth and Regional Decline," Handbook of Economic Growth,in: Handbook of Economic Growth, edition 1, volume 2, chapter 4, pages 683-779 Elsevier.
    3. Monika Mr?zov? & J. Peter Neary, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," American Economic Review, American Economic Association, vol. 104(5), pages 298-303, May.
    4. Robert Dekle & Hyeok Jeong & Heajin H. Ryoo, 2016. "Firm-Level Heterogeneity and the Aggregate Exchange Rate Effect on Exports," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 435-447, September.
    5. Keith Head & Thierry Mayer & Mathias Thoenig, 2014. "Welfare and Trade without Pareto," American Economic Review, American Economic Association, vol. 104(5), pages 310-316, May.
    6. Marco Bee & Stefano Schiavo, 2018. "Powerless: gains from trade when firm productivity is not Pareto distributed," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 15-45, February.
    7. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2017. "Monopolistic competition and optimum product selection: Why and how heterogeneity matters," Research in Economics, Elsevier, vol. 71(4), pages 704-717.
    8. Maemir, H. & Ziesemer, T., 2014. "Multinational production and trade in an endogenous growth model with heterogeneous firms," MERIT Working Papers 038, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    9. Gianmarco I. P. Ottaviano, 2014. "European Integration and the Gains from Trade," CEP Discussion Papers dp1301, Centre for Economic Performance, LSE.
    10. Arnaud Costinot & Dave Donaldson & Jonathan Vogel & Iván Werning, 2015. "Comparative Advantage and Optimal Trade Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 659-702.
    11. Baier, Scott L. & Bergstrand, Jeffrey H. & Feng, Michael, 2014. "Economic integration agreements and the margins of international trade," Journal of International Economics, Elsevier, vol. 93(2), pages 339-350.
    12. Pamela Bombarda & Stefania Marcassa, 2014. "Gains from Intra-Firm Trade and Multinational Production," THEMA Working Papers 2014-14, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    13. Levchenko, Andrei A. & Zhang, Jing, 2014. "Ricardian productivity differences and the gains from trade," European Economic Review, Elsevier, vol. 65(C), pages 45-65.
    14. Catia Montagna & Antonella Nocco, 2015. "(De)Unionization, Trade Liberalization and Selection," Metroeconomica, Wiley Blackwell, vol. 66(1), pages 91-122, February.
    15. repec:esx:essedp:729 is not listed on IDEAS
    16. Pamela Bombarda & Stefania Marcassa, 2017. "Intra-Firm Trade, Multinational Production, and Welfare," THEMA Working Papers 2017-15, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    17. F. Langot & M. Lemoine, 2014. "Strategic fiscal revaluation or devaluation: why does the labor wedge matter?," Working papers 516, Banque de France.
    18. Roberto Roson & Kazuhiko Oyamada, 2014. "Modeling Firm Heterogeneity in International Trade: Do General Equilibrium Effects Matter?," EcoMod2014 6669, EcoMod.

    More about this item

    Keywords

    firm heterogeneity; welfare gains from trade;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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