Trade Liberalizations with Granular Firms

Martin Alfaro and Frédéric Warzynski

No 2020-9, Working Papers from University of Alberta, Department of Economics

Abstract: We quantify the effects of trade liberalization accounting for a fact identified with rich firm-product Danish data: the bulk of manufacturing revenue comes from industries where domestic leaders coexist with a competitive fringe. Our framework features firm-level heterogeneity, extensive-margin adjustments, and allows for a subset of non-negligible firms that behave strategically and have positive profits which are passed back to consumers. In this setup, since profits are affected positively by new export opportunities but negatively by tougher competition, gains of trade are not guaranteed. Estimating the model establishes that a trade liberalization increases Danish income and, hence, welfare. Nonetheless, the predicted gains are substantially lower than if we characterize firms as in the standard monopolistic competition framework.

Keywords: granularity; large firms; gains of trade; small-economy assumption (search for similar items in EconPapers)
JEL-codes: F10 F12 L13 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-07-19
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (1)

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Journal Article: Trade liberalization with granular firms (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2020_009

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