Working Paper: NBER ID: w21370
Authors: Costas Arkolakis; Arnaud Costinot; Dave Donaldson; Andrés Rodríguez-Clare
Abstract: We study the gains from trade liberalization in models with monopolistic competition, firm-level heterogeneity, and variable markups. For a large class of demand functions used in the international macro and trade literature, we derive a parsimonious generalization of the welfare formula in Arkolakis, Costinot, and Rodríguez-Clare (2012). We then use micro-level trade data to quantify the implications of this new formula. Our main finding is that gains from trade liberalization predicted by models with variable markups are slightly lower than those predicted by models with constant markups. In this sense, pro-competitive effects of trade are elusive.
Keywords: trade liberalization; monopolistic competition; firm-level markups; welfare gains
JEL Codes: F1; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | welfare gains (variable markups lower than constant markups) (D69) |
| decline in trade costs (F19) | decrease in domestic markups (F61) |
| decline in trade costs (F19) | lower residual demand for domestic goods (F69) |
| trade liberalization (F13) | lower overall welfare gains (D69) |
| elasticity of markups concerning firm productivity (D21) | welfare implications of trade liberalization (F10) |