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Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade

Rodrigo Adao, Arnaud Costinot and Dave Donaldson

American Economic Review, 2017, vol. 107, issue 3, 633-89

Abstract: We develop a methodology to construct nonparametric counterfactual predictions, free of functional form restrictions on preferences and technology, in neoclassical models of international trade. First, we establish the equivalence between such models and reduced exchange models in which countries directly exchange factor services. This equivalence implies that, for an arbitrary change in trade costs, counterfactual changes in the factor content of trade, factor prices, and welfare only depend on the shape of a reduced factor demand system. Second, we provide sufficient conditions under which estimates of this system can be recovered nonparametrically. Together, these results offer a strict generalization of the parametric approach used in so-called gravity models. Finally, we use China's recent integration into the world economy to illustrate the feasibility and potential benefits of our approach.

JEL-codes: C51 D51 F11 F14 O19 P33 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20150956
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Working Paper: Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade (2015) Downloads
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