 How Strong is the Love of Variety?Adina Ardelean No 331580, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project Abstract: Models with monopolistic competition and constant elasticity of substitution (CES) preferences have become a mainstay of theoretical and empirical work in international trade. However, the standard model yields contrafactual predictions on the number of varieties, prices and output per variety that are traded. In particular the model predicts a rate of variety growth that is faster than that observed in the data. This paper develops and tests a model with a more general, but still tractable, CES preference structure that nests Krugman (1980) and Armington (1969) style models. With limited love of variety the consumer faces a trade-off between buying more varieties or higher quantities per variety and in equilibrium the model yields a variety growth rate consistent with the data. The empirics confirm that consumer’s “love of variety” is 42 percent lower than is assumed in Krugman’s model. One implication is that existing studies overstate the variety gains from trade liberalization. Another is that the impact of product variety on economic growth and the strength of industrial agglomerations is smaller than is typically assumed. Keywords: International Relations/Trade; Research Methods/Statistical Methods (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:331580 Access Statistics for this paper More papers in Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project Contact information at EDIRC. |
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