Working Paper: CEPR ID: DP9826
Authors: Keith Head; Thierry Mayer; Mathias Thoenig
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.
Keywords: Pareto; Trade; Welfare
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pareto heterogeneity (D39) | gains from trade (F11) |
| lognormal heterogeneity (C46) | gains from trade (F11) |
| lognormal distribution (C46) | gains from trade (F11) |
| Pareto distribution (D39) | gains from trade (F11) |
| calibration of fixed costs and productivity distribution parameters (D24) | gains from trade (F11) |