Love-for-Variety: with an application to an Armington model of competitive trade

Kiminori Matsuyama and Philip Ushchev

No 18184, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We define and characterize love-for-variety, which measures the consumer’s desire to consume more variety of goods, first for general homothetic symmetric preferences, and then for the two classes of GM-CES and the three classes of HSA/HDIA/HIIA. These five classes are pairwise-disjoint with the sole exception of CES. If we depart from CES within GM-CES, the standard CES measure of love-for-variety underestimates the true love-for-variety, potentially by a wide margin. If we depart from CES within HSA/HDIA/HIIA by introducing the 2nd law of demand, the standard CES measure overestimates the true love-for-variety. We illustrate these and other results in an Armington model of competitive trade, where countries differ in the variety of goods they produce, and we show how the ACR formula for the gains from trade needs to be modified.

Date: 2023-05
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