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Welfare and Trade Without Pareto

Author

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  • Mayer, Thierry
  • Head, Keith

Abstract

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.

Suggested Citation

  • Mayer, Thierry & Head, Keith, 2014. "Welfare and Trade Without Pareto," CEPR Discussion Papers 9826, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9826
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    More about this item

    Keywords

    Pareto; Trade; Welfare;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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