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Globalization, Markups and U.S. Welfare

  • Robert C. Feenstra
  • David E. Weinstein

This paper is the first attempt to structurally estimate the impact of globalization on markups, and the effect of changing markups on welfare, in a monopolistic competition model. To achieve this, we work with a class of preferences that allow for endogenous markups and firm entry and exit that are especially convenient for empirical work - the translog preferences, with symmetry in substitution imposed across products. Between 1992 and 2005 we find the U.S. market experienced a series of changes that confirm a pro-competitive effect: import shares rose and U.S. firms exited, leading to an implied fall in markups, while product variety and welfare went up. We estimate the impacts of these effects on a national level, and find that U.S. welfare rose by as much as 0.86 percent between 1992 and 2005 as a result of these changes, with product variety contributing one-half of that total.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15749.

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Date of creation: Feb 2010
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Handle: RePEc:nbr:nberwo:15749
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