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Productivity and firm selection: quantifying the "new" gains from trade

  • Corocs Gregory
  • Massimo Del Gatto
  • Giordano Mion
  • Gianmarco I P. Ottaviano

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 firms; 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 firm scale and richer product variety. We believe our analysis provides enough ground to support the inclusion of firm heterogeneity and selection effects in the standard toolkit of trade policy evaluation.

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File URL: http://eprints.lse.ac.uk/33249/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 33249.

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Length: 39 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:ehl:lserod:33249
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Web page: http://www.lse.ac.uk/

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