Trade Costs, Generalized Demand, and Firm Selection

This paper extends the canonical Melitz–Chaney framework beyond the CES to characterize the selection effect à la Melitz (2003) under generalized demand. It uses a Gorman-Pollak demand system that nests direct and indirect separability and keeps demand curvature unrestricted. The selection effect is always operative and remains the dominant welfare channel in this gravityconsistent environment. The model generalizes the ACR formula (Arkolakis et al., 2012) and reveals that by shaping export participation patterns, demand curvature governs the intensity of the competitive pressure trade exerts on domestic firms forcing them to exit. Super-convex demand yields an upper bound for the probability of exporting and the average export productivity and thus magnifies trade-induced firm exit. Hence, by magnifying the selection effect, it yields an upper bound for the gains from trade. These patterns are reversed under sub-convex demand. Within these bounds, CES demand delivers an intermediate outcome. This paper thus uncovers new implications of demand curvature previously unexplored in the trade literature