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Trade policies, firm heterogeneity, and variable markups

Svetlana Demidova

Journal of International Economics, 2017, vol. 108, issue C, 260-273

Abstract: We study unilateral trade liberalization in a model of monopolistic competition with heterogeneous firms, endogenous wages, and non-separable and non-homothetic quadratic preferences that generate variable markups. We show that the optimal level of the revenue-generating import tariff is strictly positive so that protection is always desirable, whether the liberalizing economy is large or small. Yet, reductions in cost-shifting trade barriers are welfare-improving, making free trade optimal. Finally, we show that in both cases, variable markups result in negative pro-competitive effects, reducing gains from trade.

Keywords: Variable markups; Firm heterogeneity; Trade liberalization (search for similar items in EconPapers)
JEL-codes: F12 F13 L11 (search for similar items in EconPapers)
Date: 2017
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