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The selection effect of two-way trade in the Melitz model: an alternative approach

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  • Jacques Potin

    (Economics Department - Essec Business School)

Abstract

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.

Suggested Citation

  • Jacques Potin, 2009. "The selection effect of two-way trade in the Melitz model: an alternative approach," Post-Print hal-00554724, HAL.
  • Handle: RePEc:hal:journl:hal-00554724
    Note: View the original document on HAL open archive server: https://hal-essec.archives-ouvertes.fr/hal-00554724
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    File URL: https://hal-essec.archives-ouvertes.fr/hal-00554724/document
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    References listed on IDEAS

    as
    1. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2005. "A PCA Factor Repeat Sales Index (1973-2001) To Forecast Apartment Prices in Paris (France)," ESSEC Working Papers DR 05002, ESSEC Research Center, ESSEC Business School.
    2. Batista, Catia & Potin, Jacques, 2008. "International Specialization and the Return to Capital, 1976-2000," ESSEC Working Papers DR 08001, ESSEC Research Center, ESSEC Business School.
    3. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2004. "The Paris Residential Market: Driving Factors and Market Behaviour 1973-2001," ESSEC Working Papers DR 04006, ESSEC Research Center, ESSEC Business School.
    4. 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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    Cited by:

    1. Rutzer, Christian, 2014. "From the Loser to the Winner - How Trade Liberalization can lead to Leapfrogging between Countries," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100313, Verein für Socialpolitik / German Economic Association.

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