Unobserved Heterogeneity in the Productivity Distribution and Gains From Trade

Ruben Dewitte, Michel Dumont, Glenn Rayp and Peter Willemé

MPRA Paper from University Library of Munich, Germany

Abstract: A correct parametric approximation of the productivity distribution is essential to calculate Gains From Trade (GFT) in heterogeneous firms models. This paper argues that heterogeneity in productivity is best captured by Finite Mixture Models (FMMs). FMMs build on the existence of unobserved subpopulations in the data. As such, they are generally consistent with models of firm dynamics differing between groups of firms and allow for a very flexible distribution fit. We find FMMs to increase this fit by more than 70% compared to currently considered distributions. A GFT exercise with Portuguese data reveals that only FMMs approximate the ‘true gains’ reasonably well.

Keywords: Finite Mixture Model; firm size distribution; productivity distribution; Gains From Trade (search for similar items in EconPapers)
JEL-codes: F11 F12 L11 (search for similar items in EconPapers)
Date: 2020-07-08
New Economics Papers: this item is included in nep-bec, nep-eff and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Unobserved heterogeneity in the productivity distribution and gains from trade (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:102711

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