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Innovation, Firm Size Distribution, and Gains from Trade

Author

Listed:
  • Chen, Yi-Fan

    (Academia Sinica)

  • Hsu, Wen-Tai

    (School of Economics, Singapore Management University)

  • Peng, Shin-Kun

    (Academia Sinica)

Abstract

We study a trade model with monopolistic competition a la Melitz (2003) that is standard except that firm heterogeneity is endogenously determined by firms innovating to enhance their productivities. We show that the equilibrium productivity and firm-size distributions exhibit power-law tails under rather general conditions on demand and technology. In particular, the emergence of the power laws is essentially independent of the underlying primitive heterogeneity among firms. We investigate the model’s welfare implications, and conduct a quantitative analysis of welfare gains from trade. We find that, conditional on the same trade elasticity and values of the common parameters, our model yields 40% higher welfare gains from trade than a standard model with exogenously given productivity distribution.

Suggested Citation

  • Chen, Yi-Fan & Hsu, Wen-Tai & Peng, Shin-Kun, 2018. "Innovation, Firm Size Distribution, and Gains from Trade," Economics and Statistics Working Papers 17-2018, Singapore Management University, School of Economics.
    • Handle: RePEc:ris:smuesw:2018_017
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    More about this item

    Keywords

    Innovation; Power law; Regular variation; Welfare gains from trade; Firm heterogeneity;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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