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Trade, firm selection, and innovation: the competition channel

Giammario Impullitti and Omar Licandro ()

No 2016-05, Discussion Papers from University of Nottingham, GEP

Abstract: We study the welfare gains originating from pro-competitive effects of trade liberalization in an economy with heterogeneous firms, variable markups and endogenous growth. Variable markups arise from oligopoly trade in similar goods, and cost-reducing innovation is the engine of sustained productivity growth. Trade liberalization stiffens product market competition by reducing markups, generating tougher firm selection and increasing the aggregate productivity level. Market share reallocations triggered by selection increase firms’ incentives to innovate, thereby leading to a higher aggregate productivity growth rate. Endogenous productivity growth boosts the selection gains from trade, leading to substantial welfare improvements. A calibrated version of the model shows that growth doubles the gains from trade obtainable in models with static firm-level productivity.

Keywords: Endogenous Growth; Heterogeneous Firms; Oligopoly; Variable Markups; Dynamic Gains from Trade. (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-bec, nep-cse, nep-dge, nep-gro, nep-ino, nep-int, nep-net and nep-tid
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https://www.nottingham.ac.uk/gep/documents/papers/2016/2016-05.pdf (application/pdf)

Related works:
Journal Article: Trade, Firm Selection and Innovation: The Competition Channel (2018) Downloads
Working Paper: Trade, firm selection, and innovation: the competition channel (2013) Downloads
Working Paper: Trade, Firm selection, and innovation: the competition channel (2010) Downloads
Working Paper: Trade, Firm Selection, and Innovation: the Competition Channel (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:not:notgep:16/05

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