IDEAS home Printed from https://ideas.repec.org/p/hal/spmain/hal-03460459.html
   My bibliography  Save this paper

Welfare and Trade without Pareto

Author

Listed:
  • Keith Head

    (Sauder - Sauder School of Business [British Columbia] - UBC - University of British Columbia)

  • Thierry Mayer

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Mathias Thoenig

    (CUI - Centre Universitaire d'Informatique - UNIGE - Université de Genève = University of Geneva)

Abstract

Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions-especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two-country model that can be twice as large as under the Pareto assumption.

Suggested Citation

  • Keith Head & Thierry Mayer & Mathias Thoenig, 2014. "Welfare and Trade without Pareto," SciencePo Working papers Main hal-03460459, HAL.
    • Handle: RePEc:hal:spmain:hal-03460459
    DOI: 10.1257/aer.104.5.310
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03460459
    as

    Download full text from publisher

    File URL: https://sciencespo.hal.science/hal-03460459/document
    Download Restriction: no
    File URL: https://libkey.io/10.1257/aer.104.5.310?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:hal:wpspec:info:hdl:2441/7o52iohb7k6srk09n8t832o04 is not listed on IDEAS
    2. Novy, Dennis, 2013. "International trade without CES: Estimating translog gravity," Journal of International Economics, Elsevier, vol. 89(2), pages 271-282.
    3. Thomas Chaney, 2018. "The Gravity Equation in International Trade: An Explanation," Journal of Political Economy, University of Chicago Press, vol. 126(1), pages 150-177.
    4. Marc J. Melitz & Stephen J. Redding, 2015. "New Trade Models, New Welfare Implications," American Economic Review, American Economic Association, vol. 105(3), pages 1105-1146, March.
    5. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, September.
    6. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 441-487.
    7. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    8. Reed, William J., 2001. "The Pareto, Zipf and other power laws," Economics Letters, Elsevier, vol. 74(1), pages 15-19, December.
    9. Xavier Gabaix, 1999. "Zipf's Law for Cities: An Explanation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 739-767.
    10. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    11. Gabaix, Xavier & Ioannides, Yannis M., 2004. "The evolution of city size distributions," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 53, pages 2341-2378, Elsevier.
    12. di Giovanni, Julian & Levchenko, Andrei A. & Rancière, Romain, 2011. "Power laws in firm size and openness to trade: Measurement and implications," Journal of International Economics, Elsevier, vol. 85(1), pages 42-52, September.
    13. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
    14. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
    15. repec:hal:spmain:info:hdl:2441/6k7m0q7h709rdrhbpm2n96irf8 is not listed on IDEAS
    16. Melitz, Marc J. & Redding, Stephen J., 2013. "Firm heterogeneity and aggregate welfare," LSE Research Online Documents on Economics 51533, London School of Economics and Political Science, LSE Library.
    17. Alan Spearot, 2016. "Unpacking the Long-Run Effects of Tariff Shocks: New Structural Implications from Firm Heterogeneity Models," American Economic Journal: Microeconomics, American Economic Association, vol. 8(2), pages 128-167, May.
    18. Thomas Chaney, 2013. "The Gravity Equation in International Trade: An Explanation," SciencePo Working papers hal-03460790, HAL.
    19. repec:hal:spmain:info:hdl:2441/7o52iohb7k6srk09n8t832o04 is not listed on IDEAS
    20. Gopinath, G. & Helpman, . & Rogoff, K. (ed.), 2014. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 4, number 4.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:spo:wpmain:info:hdl:2441/f6h8764enu2lskk9p2m9j4i07 is not listed on IDEAS
    2. repec:hal:spmain:info:hdl:2441/f6h8764enu2lskk9p2m9j4i07 is not listed on IDEAS
    3. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p2m9j4i07 is not listed on IDEAS
    4. repec:hal:wpspec:info:hdl:2441/f6h8764enu2lskk9p2m9j4i07 is not listed on IDEAS
    5. Nigai, Sergey, 2017. "A tale of two tails: Productivity distribution and the gains from trade," Journal of International Economics, Elsevier, vol. 104(C), pages 44-62.
    6. Erick Sager & Olga A. Timoshenko, 2019. "The double EMG distribution and trade elasticities," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(4), pages 1523-1557, November.
    7. repec:hal:spmain:info:hdl:2441/5fjm1f1p0v93k9png4qo8ltnrf is not listed on IDEAS
    8. Bas, Maria & Mayer, Thierry & Thoenig, Mathias, 2017. "From micro to macro: Demand, supply, and heterogeneity in the trade elasticity," Journal of International Economics, Elsevier, vol. 108(C), pages 1-19.
    9. repec:spo:wpmain:info:hdl:2441/5fjm1f1p0v93k9png4qo8ltnrf is not listed on IDEAS
    10. Keith Head & Thierry Mayer & Mathias Thoenig, 2014. "Welfare and Trade without Pareto," American Economic Review, American Economic Association, vol. 104(5), pages 310-316, May.
    11. Rodrigo Adão & Costas Arkolakis & Sharat Ganapati, 2020. "Aggregate Implications of Firm Heterogeneity: A Nonparametric Analysis of Monopolistic Competition Trade Models," Working Papers 2020-161, Becker Friedman Institute for Research In Economics.
    12. Massimo Riccaboni & Stefano Schiavo, 2012. "Stochastic Trade Networks," DEGIT Conference Papers c017_014, DEGIT, Dynamics, Economic Growth, and International Trade.
    13. Dewitte, Ruben, 2020. "From Heavy-Tailed Micro to Macro: on the characterization of firm-level heterogeneity and its aggregation properties," MPRA Paper 103170, University Library of Munich, Germany.
    14. Breinlich, Holger & Ottaviano, Gianmarco I.P. & Temple, Jonathan R.W., 2014. "Regional Growth and Regional Decline," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 4, pages 683-779, Elsevier.
    15. Baier, Scott L. & Bergstrand, Jeffrey H. & Clance, Matthew W., 2018. "Heterogeneous effects of economic integration agreements," Journal of Development Economics, Elsevier, vol. 135(C), pages 587-608.
    16. Monika Mrázová & J. Peter Neary & Mathieu Parenti, 2021. "Sales and Markup Dispersion: Theory and Empirics," Econometrica, Econometric Society, vol. 89(4), pages 1753-1788, July.
    17. Ruben Dewitte & Michel Dumont & Glenn Rayp & Peter Willemé, 2022. "Unobserved heterogeneity in the productivity distribution and gains from trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(3), pages 1566-1597, August.
    18. Guohua Peng & Fan Xia, 2016. "The size distribution of exporting and non-exporting firms in a panel of Chinese provinces," Papers in Regional Science, Wiley Blackwell, vol. 95, pages 71-85, March.
    19. Scott L Baier & Jeffrey H Bergstrand & Matthew W Clance, 2017. "Heterogeneous economic integration agreements' effects, gravity, and welfare," Discussion Papers 2017-05, University of Nottingham, GEP.
    20. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 2, pages 15-78, Edward Elgar Publishing.
    21. repec:esx:essedp:729 is not listed on IDEAS
    22. Lorenzo Caliendo & Robert C. Feenstra & John Romalis & Alan M. Taylor, 2015. "Tariff Reductions, Entry, and Welfare: Theory and Evidence for the Last Two Decades," NBER Working Papers 21768, National Bureau of Economic Research, Inc.
    23. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    24. Esposito, Federico, 2022. "Demand risk and diversification through international trade," Journal of International Economics, Elsevier, vol. 135(C).
    25. Joseph S. Shapiro & Reed Walker, 2018. "Why Is Pollution from US Manufacturing Declining? The Roles of Environmental Regulation, Productivity, and Trade," American Economic Review, American Economic Association, vol. 108(12), pages 3814-3854, December.
    26. Anderson, James E. & Yotov, Yoto V., 2020. "Short run gravity," Journal of International Economics, Elsevier, vol. 126(C).
    27. Thomas Chaney, 2014. "The Network Structure of International Trade," American Economic Review, American Economic Association, vol. 104(11), pages 3600-3634, November.

    More about this item

    Keywords

    Welfare Theory; Trade Models; Microdata Simulations;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:spmain:hal-03460459. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Contact - Sciences Po Departement of Economics (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.