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Welfare and Trade Without Pareto

Keith Head, Thierry Mayer () and Mathias Thoenig ()

No 9826, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions—especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two country model that can be twice as large as under the Pareto assumption.

Keywords: Pareto; trade; welfare (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2014-02
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Working Paper: Welfare and Trade without Pareto (2014) Downloads
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