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New Trade Models, New Welfare Implications

  • Marc Melitz
  • Stephen Redding

We show that endogenous firm selection provides a new welfare margin for heterogeneous firm�models of trade (relative to homogeneous firm models). Under some parameter restrictions, the�trade elasticity is constant and is a sufficient statistic for welfare, along with the domestic trade�share. However, even small deviations from these restrictions imply that trade elasticities are�variable and differ across markets and levels of trade costs. In this more general setting, the�domestic trade share and endogenous trade elasticity are no longer sufficient statistics for welfare.�Additional empirically observable moments of the micro structure also matter for welfare.KEYWORDS: firm heterogeneity, welfare gains from trade, trade policy evaluationJ.E.L. CLASSIFICATION: F12, F15

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Paper provided by Harvard University OpenScholar in its series Working Paper with number 65406.

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Handle: RePEc:qsh:wpaper:65406
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  1. Ariel Burstein & Andrew Atkeson, 2009. "Innovation, Firm Dynamics, and International Trade," 2009 Meeting Papers 186, Society for Economic Dynamics.
  2. Robert C. Feenstra, 2010. "Measuring the gains from trade under monopolistic competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 1-28, February.
  3. Dennis Novy, 2010. "International Trade Without CES: Estimating Translog Gravity," CEP Discussion Papers dp1031, Centre for Economic Performance, LSE.
  4. Andrew B. Bernard & J. Bradford Jensen & Stephen Redding & Peter K. Schott, 2007. "Firms in International Trade," CEP Discussion Papers dp0795, Centre for Economic Performance, LSE.
  5. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  6. Dennis Novy, 2013. "International trade without CES: estimating translog gravity," LSE Research Online Documents on Economics 57367, London School of Economics and Political Science, LSE Library.
  7. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
  8. Michael Waugh & Ina Simonovska, 2012. "Different Trade Models, Different Trade Elasticities?," 2012 Meeting Papers 618, Society for Economic Dynamics.
  9. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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