Working Paper: NBER ID: w21408
Authors: jae wook jung; ina simonovska; ariel weinberger
Abstract: We quantify a class of commonly-employed general equilibrium models of international trade and pricing-to-market that feature firm-level heterogeneity and consumers with nonhomothetic preferences. We demonstrate theoretically that the models lack the flexibility to match salient features of US firm-level data. Consequently, we outline a theoretical framework that can reconcile the documented price dispersion across firms and markets, while maintaining consistency with cross-sectional observations on firm productivity and sales. We calibrate the model’s parameters to match bilateral trade flows across 71 countries as well as the productivity and sales advantages of US exporters over non-exporters. We find that the calibrated model accounts for the majority of the dispersion in prices of tradables across countries of different income levels, while maintaining a tight quantitative fit to firm-level data. Given its additional flexibility, the model quantitatively outperforms the existing alternatives and yields welfare gains for the US that are 14-54% higher, but at the cost of loss of tractability.
Keywords: No keywords provided
JEL Codes: F12; F14; F17; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| destination per capita income (D31) | prices of tradable goods (P22) |
| model parameters (C51) | price dispersion (L11) |
| trade equilibrium (F10) | welfare gains for the US economy (D69) |