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Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity

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  • Robert C. Feenstra

Abstract

The monopolistic competition model in international trade offers three sources of gains from trade that do not arise in competitive models: expansion in product variety; a pro-competitive reduction in the markups charged by firms; and the self-selection of more efficient firms into exporting. Recent literature on trade with heterogeneous firms has emphasized the third of these effects, and the first two effects are ruled out when using a Pareto distribution for productivity with a support that is unbounded above. The goal of this paper is to restore a role for product variety and pro-competitive gains from trade by using a bounded Pareto distribution for productivity.

Suggested Citation

  • Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19833 Note: ITI
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2014. "Market Size, Competition, and the Product Mix of Exporters," American Economic Review, American Economic Association, pages 495-536.
    2. Parenti, Mathieu & Ushchev, Philip & Thisse, Jacques-François, 2017. "Toward a theory of monopolistic competition," Journal of Economic Theory, Elsevier, vol. 167(C), pages 86-115.
    3. Colin J. Hottman & Stephen J. Redding & David E. Weinstein, 2016. "Quantifying the Sources of Firm Heterogeneity," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1291-1364.
    4. Asturias, Jose & García-Santana, Manuel & Ramos Magdaleno, Roberto, 2016. "Competition and the welfare gains from transportation infrastructure: Evidence from the Golden Quadrilateral of India," CEPR Discussion Papers 11283, C.E.P.R. Discussion Papers.
    5. Nigai, Sergey, 2017. "A tale of two tails: Productivity distribution and the gains from trade," Journal of International Economics, Elsevier, pages 44-62.
    6. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2015. "The Elusive Pro-Competitive Effects of Trade," NBER Working Papers 21370, National Bureau of Economic Research, Inc.
    7. Wyatt J. Brooks & Pau S. Pujolàs, 2014. "Nonlinear Gravity," Department of Economics Working Papers 2014-15, McMaster University.
    8. Pablo D. Fajgelbaum & Amit K. Khandelwal, 2016. "Measuring the Unequal Gains from Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1113-1180.
    9. repec:aea:aecrev:v:107:y:2017:i:12:p:3835-74 is not listed on IDEAS
    10. Svetlana Demidova, 2015. "Trade Policies, Firm Heterogeneity, and Variable Markups," Department of Economics Working Papers 2015-04, McMaster University.
    11. Monika Mrázová & J. Peter Neary, 2017. "Not So Demanding: Demand Structure and Firm Behavior," American Economic Review, American Economic Association, pages 3835-3874.
    12. repec:eee:inecon:v:108:y:2017:i:c:p:260-273 is not listed on IDEAS
    13. Joseph S. Shapiro & Reed Walker, 2015. "Why is Pollution from U.S. Manufacturing Declining? The Roles of Trade, Regulation, Productivity, and Preferences," NBER Working Papers 20879, National Bureau of Economic Research, Inc.
    14. Nigai, Sergey, 2017. "A tale of two tails: Productivity distribution and the gains from trade," Journal of International Economics, Elsevier, pages 44-62.
    15. Hottman, Colin & Redding, Stephen & Weinstein, David E., 2014. "What is 'firm heterogeneity' in trade models? The role of quality, scope, markups and cost," LSE Research Online Documents on Economics 60448, London School of Economics and Political Science, LSE Library.
    16. repec:eee:reecon:v:71:y:2017:i:4:p:645-649 is not listed on IDEAS
    17. Diez, Federico J. & Mora, Jesse & Spearot, Alan C., 2016. "Firms in international trade," Working Papers 16-25, Federal Reserve Bank of Boston.
    18. Igor Bagayev & Ronald B. Davies, 2017. "The Impact of Protection on Observed Productivity Distributions," Working Papers 201705, School of Economics, University College Dublin.
    19. 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.
    20. repec:hrv:faseco:34299161 is not listed on IDEAS
    21. repec:eee:ecolet:v:158:y:2017:i:c:p:26-29 is not listed on IDEAS
    22. Weinberger, Ariel & Xuefeng, Qian & Yasar, Mahmut, 2017. "Export Tax Rebates and Resource Misallocation: Evidence from a Large Developing Countr," Globalization and Monetary Policy Institute Working Paper 302, Federal Reserve Bank of Dallas.
    23. Chen Yeh, 2017. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 17-23, Center for Economic Studies, U.S. Census Bureau.
    24. Etro, Federico, 2017. "The Heckscher–Ohlin model with monopolistic competition and general preferences," Economics Letters, Elsevier, pages 26-29.
    25. Chen Yeh, 2016. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 16-47, Center for Economic Studies, U.S. Census Bureau.

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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