Working Paper: NBER ID: w21984
Authors: Paolo Bertoletti; Federico Etro; Ina Simonovska
Abstract: We develop a general equilibrium model of monopolistic competition and trade based on indirectly additive preferences and heterogenous firms. It generates markups independent from destination population but increasing in destination per capita income, as documented empirically. Trade liberalization delivers an increase in consumed variety and incomplete cost pass-through. This leads to welfare gains that can be much lower than those predicted by comparable models with different preferences. We introduce a tractable utility function that further predicts that small firms grow more during trade liberalization and pass through cost changes more than do large firms. Once we estimate the model to match moments from cross-firm and cross-country data we (i) find quantitatively large differences in the welfare gains from trade relative to models based on homothetic preferences, and (ii) evaluate the gains and losses from the Transatlantic Trade and Investment Partnership agreement.
Keywords: international trade; indirect additivity; welfare gains; trade liberalization
JEL Codes: D11; D43; F12; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | increase in consumed variety (D11) |
| increase in consumed variety (D11) | welfare gains (D69) |
| trade liberalization (F13) | incomplete cost pass-through (H29) |
| incomplete cost pass-through (H29) | welfare gains (D69) |
| trade liberalization (F13) | greater growth for smaller firms (L25) |
| destination income (E25) | markups (D43) |
| destination per capita income (D31) | extensive margin (F12) |
| trade costs (F19) | extensive margin (F12) |
| nature of consumer preferences (D11) | welfare gains from trade liberalization (F10) |
| demand elasticity (D12) | smaller welfare gains from trade liberalization (D69) |