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Trade and the Environment with Heterogeneous Firms


  • Bajona, Claustre
  • Pierce, Andrea
  • Missios, Paul


As the world is becoming more globalized and international trade agreements proliferate, there is a rising concern that trade liberalization may be detrimental to the environment. In a seminal paper Antweiler, Copeland, and Taylor (2001) identify three channels through which may trade affect the environment: Reducing trade barriers increases output (scale effect), abatement expenditures (technique effect), and changes the composition of goods produced (composition effect). All these channels operate at the country level and/or the industry levels. In this paper we focus on the effect that trade liberalization has on the pollution behavior of individual firms. We develop a theoretical framework that is able to account for differences in pollution behavior across firms within the same industry by embedding a model of trade with heterogeneous firms into the classical literature of trade and the environment following Antweiler, Copeland and Taylor (2001). The model shows that firm heterogeneity is important in determining the economy’s aggregate behavior. In particular, more productive firms are less pollution intensive and are more likely to be exporters than less productive firms. The model identifies a new channel through which trade affects the environment: a “selection effect”. International trade causes the less productive firms within an industry to exit. Since less productive firms are more pollution intensive, through this channel international trade reduces pollution intensity by “selecting” these firms out of the industry.

Suggested Citation

  • Bajona, Claustre & Pierce, Andrea & Missios, Paul, 2010. "Trade and the Environment with Heterogeneous Firms," MPRA Paper 71405, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:71405

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    References listed on IDEAS

    1. Li, Zhe, 2008. "Productivity Dispersion across Plants, Emission Abatement, and Environmental Policy," MPRA Paper 9564, University Library of Munich, Germany.
    2. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 245-276.
    3. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    5. Mazzanti, Massimiliano & Zoboli, Roberto, 2009. "Environmental efficiency and labour productivity: Trade-off or joint dynamics? A theoretical investigation and empirical evidence from Italy using NAMEA," Ecological Economics, Elsevier, vol. 68(4), pages 1182-1194, February.
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    Cited by:

    1. Joseph S. Shapiro & Reed Walker, 2018. "Why Is Pollution from US Manufacturing Declining? The Roles of Environmental Regulation, Productivity, and Trade," American Economic Review, American Economic Association, vol. 108(12), pages 3814-3854, December.
    2. Joseph S. Shapiro & Reed Walker, 2015. "Why is Pollution from U.S. Manufacturing Declining? The Roles of Trade, Regulation, Productivity, and Preferences," Cowles Foundation Discussion Papers 1982R, Cowles Foundation for Research in Economics, Yale University, revised Sep 2016.
    3. Rodrigue, Joel & Soumonni, Omolola, 2014. "Deforestation, foreign demand and export dynamics in Indonesia," Journal of International Economics, Elsevier, vol. 93(2), pages 316-338.
    4. Yoshifumi Konishi & Nori Tarui, 2013. "Intra-Industry Reallocations and Long-run Impacts of Environmental Regulations," Working Papers 201307, University of Hawaii at Manoa, Department of Economics.

    More about this item


    trade; environment; heterogeneous firms; Melitz model; productivity; pollution;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth


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