Working Paper: NBER ID: w18919
Authors: Marc J. Melitz; Stephen J. Redding
Abstract: We show that endogenous firm selection provides a new welfare margin for heterogeneous firm models of trade (relative to homogeneous firm models). Under some parameter restrictions, the trade elasticity is constant and is a sufficient statistic for welfare, along with the domestic trade share. However, even small deviations from these restrictions imply that trade elasticities are variable and differ across markets and levels of trade costs. In this more general setting, the domestic trade share and endogenous trade elasticity are no longer sufficient statistics for welfare. Additional empirically observable moments of the micro structure also matter for welfare.
Keywords: trade models; welfare implications; firm heterogeneity
JEL Codes: F12; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneous firm model (D29) | Higher welfare outcome (I31) |
| Homogeneous firm model (F12) | Lower welfare outcome (I38) |
| Trade costs (F19) | Welfare outcomes (I38) |
| Decreasing trade costs (F12) | Larger welfare gains in heterogeneous model (D69) |
| Increasing trade costs (F19) | Smaller welfare losses in heterogeneous model (D69) |
| Firm selection (L20) | Extra margin of adjustment (Y20) |
| Productivity distribution (D39) | Welfare implications (D69) |