Firm heterogeneity and international trade

Priyaranjan Jha and Jibonayan Raychaudhuri

Chapter 15 in Elgar Encyclopedia of International Trade, 2026, pp 70-75 from Edward Elgar Publishing

Abstract: This entry reviews heterogeneous-firm trade models pioneered by Melitz (2003) and the evidence they organize: sparse exporting, superstar dominance, exporter premiums, and reallocation through entry/exit. It summarizes core mechanisms—selection into exporting, intensive-extensive margins, and welfare effects—and synthesizes prominent extensions on multinational activity and sourcing, aggregate trade volumes with zeros, endogenous innovation, financial frictions, labor market frictions that link trade to unemployment and wage dispersion, variable markups and pro-competitive discipline, and global value chains. Empirical highlights include plant-level responses to liberalization and firm-level gravity patterns. The entry concludes with welfare implications, emphasizing when microstructure matters beyond sufficient-statistics approaches.

Keywords: Melitz model; Firm heterogeneity; Extensive and intensive margins; Reallocation effects; Labor-market frictions; Foreign direct investment (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035327492
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