Sector-Level Economies of Scale: Estimation Using Trade Data

Dave Donaldson, Arnaud Costinot, Andres Rodriguez-Clare and Dominick Bartelme
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Dave Donaldson: Stanford University
Dominick Bartelme: University of Michigan

No 1643, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Sector-level economies of scale matter for economic development, industrial policy, and the consequences of trade liberalization. As of yet, however, the literature has not converged on a definitive answer regarding their existence and even less an estimate of their magnitude and variation across sectors. For example, most quantitative trade papers explicitly or implicitly assume that the sector-level scale elasticity is either zero or equal to the inverse of the trade elasticity. This paper develops a two-step strategy for estimating sector-level scale elasticities using bilateral trade data. First, a revealed preference approach is used to compute the productivity of each sector-country cell from observed bilateral trade flows. Second, a market access approach is used to construct demand shifters that vary across sector-country cells. The scale elasticity (a supply side parameter) is recovered from a regression of productivity on sector size using the constructed demand shifters as instrumental variables. Preliminary results suggest that economies of scale are positive but not as large as those implicitly imposed in many leading quantitative trade models.

Date: 2017
New Economics Papers: this item is included in nep-eff and nep-int
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