Welfare Effects of Trade Liberalization with Intra-industry Reallocations: The Importance of Preferences and Market Failures

Allan Sørensen

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper shows that the novel gains from trade liberalization driven by intra-industry reallocations (Melitz (2003)) are not robust to changes in the preference structure. In the Melitz (2003) setting the unambigousness of the welfare effect depends crucially on the assumption of traditional CES pref- erences, which ensures equivalence of the market equilibrium and the social planner solution. For other preferences this equivalence is broken and trade liberalization may reduce welfare by magnifying market failures. An exact condition for trade liberalization to reduce overall welfare is derived under the assumptions of generalized CES preferences and a specific distribution (Pareto) of firm heterogeneity.

Keywords: Heterogenous firms; monopolistic competition; trade liberalization; welfare (search for similar items in EconPapers)
JEL-codes: D6 F12 F15 (search for similar items in EconPapers)
Pages: 24
Date: 2010-01-14
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2010-02

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