Working Paper: NBER ID: w19833
Authors: Robert C. Feenstra
Abstract: The monopolistic competition model in international trade offers three sources of gains from trade that do not arise in competitive models: expansion in product variety; a pro-competitive reduction in the markups charged by firms; and the self-selection of more efficient firms into exporting. Recent literature on trade with heterogeneous firms has emphasized the third of these effects, and the first two effects are ruled out when using a Pareto distribution for productivity with a support that is unbounded above. The goal of this paper is to restore a role for product variety and pro-competitive gains from trade by using a bounded Pareto distribution for productivity.
Keywords: Trade; Heterogeneous Firms; Productivity; Pareto Distribution; Monopolistic Competition
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade (F19) | product variety (L15) |
| trade (F19) | markups (D43) |
| markups (D43) | consumer prices (P22) |
| firm selection (L10) | productivity (O49) |
| trade (F19) | self-selection of efficient firms (L25) |