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From Heavy-Tailed Micro to Macro: on the characterization of firm-level heterogeneity and its aggregation properties

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  • Dewitte, Ruben

Abstract

This paper emphasizes the importance of two sufficient statistics to characterize firm-level heterogeneity in the workhorse heterogeneous firms trade model: the Cumulative Distribution Function (CDF) and the mean of firm-level sales. Contradicting the strong focus on the CDF, a close fit to average sales proves to be critical for model performance. Moreover, this average varies largely across finite sample draws due to sales being heavy-tailed, providing evidence that individual firms can influence the aggregate economy. As a result, modeled aggregate trade elasticities and Gains From Trade are unlikely to materialize: they are biased in finite samples and underlying characterizations of firm-level heterogeneity are rejected by the data.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:103170
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    File URL: https://mpra.ub.uni-muenchen.de/103170/1/MPRA_paper_103170.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Average productivity; firm size distribution; heavy-tailed Distributions; granularity; gains from trade;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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