Working Paper: CEPR ID: DP7369
Authors: Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Südekum
Abstract: We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose ?border effects? into a ?pure? border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.
Keywords: counterfactual analysis; endogenous markups; firm heterogeneity; general equilibrium; gravity equation system; monopolistic competition
JEL Codes: F12; F15; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade integration between Canada and the US (F15) | significant changes in regional wages and productivity (O49) |
| Removing trade distortions imposed by the Canada-US border (F13) | 57.1% increase in Canadian labor productivity (O49) |
| Removing trade distortions imposed by the Canada-US border (F13) | 0.3% increase in US labor productivity (O49) |
| Removing trade distortions imposed by the Canada-US border (F13) | increase in relative wages in Canadian provinces (J39) |
| Removing trade distortions imposed by the Canada-US border (F13) | decrease in US regional markups (L11) |
| Removing the border (Y60) | promote wage convergence across Canada and the US (J39) |
| Removing trade distortions (F13) | enhance consumption diversity and welfare gains for all provinces and states (D69) |