Modeling Firm Heterogeneity in International Trade: Do Structural Effects Matter?

Roberto Roson and Kazuhiko Oyamada

No 70, IEFE Working Papers from IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy

Abstract: This paper analyzes the qualitative properties of a multisectoral, multiregional computable general equilibrium model where some industries include heterogeneous firms as in Melitz (2003). The model, formulated according to Roson and Oyamada (2014), adds endogenous productivity effects to a standard Walras-Ricardian framework. We argue that the inclusion of such effects changes the magnitude and distribution of welfare benefits obtainable by reductions in trade barriers, due to of comparative advantages. We illustrate the point through a numerical example, in which alternative model formulations are assessed. A standard neoclassic GE model, a basic Melitz model and a hybrid model are then compared. The three model versions are all calibrated with the same data set and an identical simulation experiment (a 50% reduction of transport costs between two regions) is carried out in the three cases. The results show that the hybrid model displays the largest welfare gains, as it combines Ricardian comparative advantages with Melitz average productivity improvements. However, they also show that new effects, not present in the original Ricardo and Melitz frameworks, are at a work..

Keywords: Computable General Equilibrium Models; Melitz; Firm Heterogeneity; International Trade. (search for similar items in EconPapers)
JEL-codes: C63 C68 D51 D58 F12 L11 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014
New Economics Papers: this item is included in nep-cmp and nep-int
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Working Paper: Modeling Firm Heterogeneity in International Trade: Do Structural Effects Matter? (2014)
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