Reallocation gains in a specific factors model with firm heterogeneity
We study firm heterogeneity in a specific factors model to address the effect of factor mobility on reallocation gains from trade. A model is proposed with Melitz type firm heterogeneity with two sectors, two countries and two fixed factors and one factor mobile across sectors. Equilibrium in each sector can be concisely represented by a demand and supply equation and a FE and ZCP condition. Varying the substitution elasticity between the fixed and mobile factor we show that the welfare gains from trade liberalization are larger in countries with a lower substitution elasticity. Furthermore, it is shown that the immobile production factor in the comparative disadvantage sector can still gain from trade liberalization due to the reallocation effect.
|Date of creation:||Oct 2011|
|Date of revision:|
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- Marc J. Melitz, 2003.
"The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,"
Econometric Society, vol. 71(6), pages 1695-1725, November.
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CER-ETH Economics working paper series
09/119, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
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"Endogenous Variety and the Gains from Trade,"
NBER Working Papers
13933, National Bureau of Economic Research, Inc.
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American Economic Review,
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