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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. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  2. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  3. Ina Simonovska & Michael E. Waugh, 2014. "Trade Models, Trade Elasticities, and the Gains from Trade," NBER Working Papers 20495, National Bureau of Economic Research, Inc.
  4. Robert C. Feenstra, 2009. "Measuring the Gains from Trade under Monopolistic Competition," NBER Working Papers 15593, National Bureau of Economic Research, Inc.
  5. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  6. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, Firm Dynamics, and International Trade," Levine's Working Paper Archive 122247000000001423, David K. Levine.
  7. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  8. 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.
  9. Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series 101, Competitive Advantage in the Global Economy (CAGE).
  10. 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.
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