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Welfare and Trade Without Pareto

  • Head, Keith
  • Mayer, Thierry
  • Thoenig, Mathias

Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions—especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two country model that can be twice as large as under the Pareto assumption.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9826.

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Date of creation: Feb 2014
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Handle: RePEc:cpr:ceprdp:9826
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  1. Julian di Giovanni & Andrei A. Levchenko & Romain Ranciere, 2010. "Power Laws in Firm Size and Openness to Trade: Measurement and Implications," Working Papers 598, Research Seminar in International Economics, University of Michigan.
  2. Eaton, Jonathan & Kortum, Samuel S & Kramarz, Francis, 2009. "An Anatomy of International Trade: Evidence from French Firms," CEPR Discussion Papers 7111, C.E.P.R. Discussion Papers.
  3. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 441-487, 05.
  4. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers 433, Society for Economic Dynamics.
  5. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
  6. Xavier Gabaix & Yannis M. Ioannides, 2003. "The Evolution of City Size Distributions," Discussion Papers Series, Department of Economics, Tufts University 0310, Department of Economics, Tufts University.
  7. Reed, William J., 2001. "The Pareto, Zipf and other power laws," Economics Letters, Elsevier, vol. 74(1), pages 15-19, December.
  8. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
  9. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
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