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Welfare and Trade without Pareto

Author

Listed:
  • Keith Head

    (Sauder School of Business (Columbia University))

  • Thierry Mayer

    (Département d'économie)

  • Mathias Thoenig

    (Centre Universitaire d'Informatique (Université de Genève))

Abstract

Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions-especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two-country model that can be twice as large as under the Pareto assumption.

Suggested Citation

  • Keith Head & Thierry Mayer & Mathias Thoenig, 2014. "Welfare and Trade without Pareto," Sciences Po publications info:hdl:2441/5fjm1f1p0v9, Sciences Po.
    • Handle: RePEc:spo:wpmain:info:hdl:2441/5fjm1f1p0v93k9png4qo8ltnrf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Welfare Theory; Trade Models; Microdata Simulations;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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