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Firm heterogeneity and aggregate welfare

Melitz, Marc J. and Redding, Stephen J. (2013) Firm heterogeneity and aggregate welfare. CEP Discussion Papers (CEPDP1200). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

We examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. We consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, we show that the two models have different aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogenous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, we find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade (as shown by Arkolakis, Costinot and Rodriguez-Clare, 2012); but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2013 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
JEL classification: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies
F - International Economics > F1 - Trade > F15 - Economic Integration
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 08 Aug 2013 08:25
Last Modified: 25 Sep 2020 23:07
URI: http://eprints.lse.ac.uk/id/eprint/51533

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