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Trade costs, home bias and the unequal gains from trade

Dorothee Hillrichs () and Gonzague Vannoorenberghe ()
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Dorothee Hillrichs: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 2021005, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: In a recent paper, Fajgelbaum and Khandelwal (2016) develop a methodology to quantify the distributional consequences of trade. Their approach relies on aggregate expenditure data and on a non-homothetic gravity equation based on an Almost Ideal Demand System (AIDS). In this setup, we show that the structural parameters governing the welfare gains are highly sensitive to the determinants of spending on domestic goods. We extend their model by allowing for a home bias in tastes or, alternatively, for more complex trade costs. While Fajgelbaum and Khandelwal (2016) find that trade typically decreases the relative price of the goods consumed by poor households, we show that the pro-poor bias of trade becomes weaker or can even turn slightly pro-rich for most countries depending on the specification.

Keywords: International trade; welfare; non-homothetic preferences; home bias (search for similar items in EconPapers)
JEL-codes: D63 F10 F14 F61 (search for similar items in EconPapers)
Date: 2021-03-03
New Economics Papers: this item is included in nep-cwa and nep-int
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