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International Trade with Indirect Additivity

Paolo Bertoletti (), Federico Etro () and Ina Simonovska ()

No 21984, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a general equilibrium model of monopolistic competition and trade based on indirectly additive preferences and heterogenous firms. It generates markups independent from destination population but increasing in destination per capita income, as documented empirically. Trade liberalization delivers an increase in consumed variety and incomplete cost pass-through. This leads to welfare gains that can be much lower than those predicted by comparable models with different preferences. We introduce a tractable utility function that further predicts that small firms grow more during trade liberalization and pass through cost changes more than do large firms. Once we estimate the model to match moments from cross-firm and cross-country data we (i) find quantitatively large differences in the welfare gains from trade relative to models based on homothetic preferences, and (ii) evaluate the gains and losses from the Transatlantic Trade and Investment Partnership agreement.

JEL-codes: D11 D43 F12 L11 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-bec, nep-int and nep-upt
Note: DEV EFG IFM IO ITI
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Published as Paolo Bertoletti & Federico Etro & Ina Simonovska, 2018. "International Trade with Indirect Additivity," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 1-57, May.
Published as Paolo Bertoletti & Federico Etro & Ina Simonovska, 2018. "International Trade with Indirect Additivity," American Economic Journal: Microeconomics, vol 10(2), pages 1-57.

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