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Trade and Welfare: Does Industrial Organization Matter?

Edward Balistreri (), Russell Hillberry and Thomas Rutherford ()

No 09/119, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Many contemporary theoretic studies of trade over geography reduce to an ex- amination of constant-elasticity reactions to changes in iceberg trade costs. These impacts are readily analyzed in simple constant-returns models based on the Arm- ington (1969) assumption of regionally differentiated goods. Following the line of reasoning suggested by Arkolakis et al. (2008) one can reach the surprising conclu- sion that industrial organization does not matter. In the present paper, we show that this finding is fragile, and with a minor elaboration of their model, the rich industrial-organization features of the popular Melitz (2003) model do, in fact, gen- erate important differences for trade and welfare.

Keywords: Variety effects; Heterogeneous firms; Gains from trade (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2009-09
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