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Productivity and Firm Selection: Quantifying the "New" Gains from Trade

  • Gregory Corcos

    (Norwegian School of Economics and Business Administration)

  • Massimo Del Gatto

    ("G.d'Annunzio" University and CRENoS)

  • Giordano Mion

    (LSE, Department of Geography, NBB, CEP and CEPR)

  • Gianmarco I.P. Ottaviano

    (KITeS, Bocconi Univerity - Milan - Italy)

We discuss how standard computable equilibrium models of trade policy can be enriched with selection effects without missing other important channels of adjustment. This is achieved by estimating and simulating a partial equilibrium model that accounts for a number of real world effects of trade liberalisation: richer availability of product varieties; tougher competition and weaker market power of rms; better exploitation of economies of scale; and, of course, efficiency gains via the selection of the most efficient firms. The model is estimated on E.U. data and simulated in counterfactual scenarios that capture several dimensions of European integration. Simulations suggest that the gains from trade are much larger in the presence of selection effects. Even in a relatively integrated economy as the E.U., dismantling residual trade barriers would deliver relevant welfare gains stemming from lower production costs, smaller markups, lower prices, larger rm scale and richer product variety. We believe our analysis provides enough ground to support the inclusion of rm heterogeneity and selection effects in the standard toolkit of trade policy evaluation.

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Paper provided by KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number 002.

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Length: pages 36
Date of creation: Mar 2009
Date of revision: Mar 2009
Handle: RePEc:cri:cespri:wp229
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