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date: 28 November 2022

Heterogeneous Firms, Trade Liberalization, and Welfarelocked

Heterogeneous Firms, Trade Liberalization, and Welfarelocked

  • Alan SpearotAlan SpearotDepartment of Economics, University of California Santa Cruz

Summary

While the modern theory of international trade allows for many different modeling assumptions, the gains from trade can often be calculated using a common set of statistics. In particular, the share of a country’s output that is consumed domestically, the elasticity of bilateral trade with respect to trade costs, and the relationship between markups and firm size, each have a clear role in the gains from integration. All of these statistics may also be structurally linked to the degree of firm heterogeneity, usually the dispersion in firm-level productivity. Accordingly, the presence of firm heterogeneity may have a meaningful impact on the welfare response to trade liberalization. A quantitative application of a common firm heterogeneity model indicates that increased dispersion of firm-level productivity has a disproportionately large and positive impact on the gains from trade for smaller, less-developed countries.

Subjects

  • International Economics

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