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Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications

Author

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  • Roberto Roson

    (Department of Economics, University Of Venice C� Foscari)

  • Kazuhiko Oyamada

    (Institute of Developing Economies, Japan External Trade Organization)

Abstract

This paper discusses which changes in the architecture of a standard CGE model are needed in order to introduce effects of trade and firm het- erogeneity � la Melitz. Starting from a simple specification with partial equilibrium, one primary production factor and one industry, the framework is progressively enriched by including multiple factors, intermedi- ate inputs, multiple industries (with a mixture of differentiated and non-differentiated products), and a real general equilibrium closure. Therefore, the model structure is gradually made similar to a full-fledged CGE. Calibration techniques are discussed, and a number of changes from the original Melitz�s assumptions are also proposed. It is argued that the inclusion of industries with heterogeneous firms in a CGE framework does not simply make the Melitz model �operational�, but allows accounting for structural effects that may significantly affect the nature, meaning and implications of the model results.

Suggested Citation

  • Roberto Roson & Kazuhiko Oyamada, 2014. "Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications," Working Papers 2014:04, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2014:04
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    References listed on IDEAS

    as
    1. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
    2. Balistreri, Edward J. & Rutherford, Thomas F., 2013. "Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1513-1570, Elsevier.
    3. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 31-66.
    4. Roberto Roson, 2006. "Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications," Computational Economics, Springer;Society for Computational Economics, vol. 28(1), pages 29-49, August.
    5. 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.
    6. Zhai, Fan, 2008. "Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of Trade," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 575-604.
    7. Oyamada, Kazuhiko, 2013. "Parameterization of applied general equilibrium models with flexible trade specifications based on the Armington, Krugman, and Melitz models," IDE Discussion Papers 380, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    8. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Roberto Roson & Kazuhiko Oyamada, 2014. "Modeling Firm Heterogeneity in International Trade: Do Structural Effects Matter?," IEFE Working Papers 70, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.

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    More about this item

    Keywords

    Computable General Equilibrium Models; Melitz; Firm Heterogeneity; International Trade.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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