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Powerless: gains from trade when firm productivity is not Pareto distributed

Marco Bee and Stefano Schiavo

Review of World Economics (Weltwirtschaftliches Archiv), 2018, vol. 154, issue 1, 15-45

Abstract: Abstract Most trade models featuring heterogeneous firms assume a Pareto productivity distribution, on the basis that it provides a reasonable representation of the data and because of its analytical tractability. However, recent work shows that the characteristics of the productivity distribution crucially affect the estimated gains from trade. This paper thoroughly compares the gains from trade obtained under three different productivity distributions (Pareto, lognormal, and Weibull) and investigates their policy implications. We find that both the magnitude of the welfare gains and the relative importance of the fixed versus variable trade costs change significantly. Hence, relying blindly on a single distribution is dangerous when performing trade policy analysis.

Keywords: Lognormal; Pareto; Weibull; International trade; Welfare; Firm heterogeneity (search for similar items in EconPapers)
JEL-codes: C46 C52 D60 F12 F13 (search for similar items in EconPapers)
Date: 2018
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