Firm Heterogeneity and the Two Sources of Gains from Trade

Itai Agur ()

No ECO2006/38, Economics Working Papers from European University Institute

Abstract: Recent empirical work identi.es two main channels through which consumers benefit from trade. Trade liberalization lowers prices, while it raises product variety. This paper develops the first model that connects both channels and interprets their interaction. It shows that heterogeneity in firm productivity is the source behind both. Upon liberalization efficient exporters enter, pushing out the least efficient domestic firms. Two countervailing forces emerge, both stylized facts. Liberalization leaves a moreconcentrated market. But exporters o¤er more variety than the .rms that they replace. Remarkably, total variety unambiguously increases. Exploration of comparative statics leads to an intuitive explanation.

Keywords: Trade; Firm selection; Product Variety; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: F12 F15 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-int
Date: 2006
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Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2006/38

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