The selection effect of two-way trade in the Melitz model: an alternative approach
This paper studies the influential Melitz model of trade with heterogeneous firms using an alternative, intuitive approach. Contrary to what is often argued, it is an increase in product market competition that drives the bad firms out: with two-way trade, entry by foreign firms is not compensated by a “sufficient” reduction in the mass of surviving firms. To illustrate this, we decompose the total effect of trade in two partial effects: a domesticprofit-reducing effect due to foreign market penetration by the most productive firms; an average-profitreducing effect due to the payment of the fixed export costs. We also provide the new prediction that trade generally leads to (weakly) less entry in the industry. This clarifies key interpretation issues in a prolific literature.
|Date of creation:||Apr 2009|
|Date of revision:|
|Publication status:||Published in ESSEC Working paper. Document de Recherche ESSEC / Centre de recherche de l'ESSEC ISSN : 1291-961.. 2009|
|Note:||View the original document on HAL open archive server: https://hal-essec.archives-ouvertes.fr/hal-00554724|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
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- Batista, Catia & Potin, Jacques, 2006. "Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995," ESSEC Working Papers DR 06008, ESSEC Research Center, ESSEC Business School.
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