Working Paper: NBER ID: w31810
Authors: Michael E. Waugh
Abstract: This paper studies the implications of household heterogeneity for trade. I develop a model where household heterogeneity is induced via incomplete markets and results in heterogeneous price elasticities. Conditional on exposure to trade, heterogeneous price elasticities imply that different households value price changes differently, and thus rich and poor households experience different gains from trade. I calibrate the model to match bilateral trade flows and micro-facts about household-level expenditure patterns and elasticities. I find gains from trade that are pro-poor and that the average gains from trade are substantially larger than representative agent benchmarks.
Keywords: household heterogeneity; trade; price elasticities; gains from trade
JEL Codes: D31; E2; F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household heterogeneity (D19) | heterogeneous price elasticities (D11) |
| heterogeneous price elasticities (D11) | different valuation of price changes across households (D11) |
| poor households (I32) | larger gains from trade (F12) |
| household income (D19) | price sensitivity (D41) |
| gains from trade (F11) | underestimated by ignoring household heterogeneity (D19) |