Efficiency Gaps, Love of Variety and International Trade
We develop a general equilibrium monopolistic competition model of trade with technical heterogeneity among firms and countries. With free entry, technical asymmetries between firms result in the endogenous determination of the equilibrium average efficiency of the industry. We show that trade reduces (increases) the minimum efficiency required to survive in the more (less) efficient country. This has important welfare implications: (1) Contrary to the constant elasticity of substitution homogeneous-firms model, trade affects welfare even when there is no love of variety. (2) There are circumstances in which trade liberalization leads to a loss of consumer welfare. Copyright 2001 by The London School of Economics and Political Science
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"New goods, old theory, and the welfare costs of trade restrictions,"
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