The selection effect of two-way trade in the Melitz model: an alternative approach

Jacques Potin
Additional contact information
Jacques Potin: ESSEC Business School

Post-Print from HAL

Abstract: This paper studies the influential Melitz model of trade with heterogeneous firms using an alternative, intuitive approach. Contrary to what is often argued, it is an increase in product market competition that drives the bad firms out: with two-way trade, entry by foreign firms is not compensated by a "sufficient" reduction in the mass of surviving firms. To illustrate this, we decompose the total effect of trade in two partial effects: a domesticprofit-reducing effect due to foreign market penetration by the most productive firms; an average-profitreducing effect due to the payment of the fixed export costs. We also provide the new prediction that trade generally leads to (weakly) less entry in the industry. This clarifies key interpretation issues in a prolific literature.

Keywords: Firm Heterogeneity; Intra-industry Trade; Selection; Commerce intra-industriel; Hétérogénéité des firmes; Sélection. (search for similar items in EconPapers)
Date: 2009-04
Note: View the original document on HAL open archive server: https://essec.hal.science/hal-00554724
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in 2009

Downloads: (external link)
https://essec.hal.science/hal-00554724/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00554724

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().