Firms and Global Production

Costas Arkolakis

No 1399, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a model monopolistic competition model of trade and multinational production (MP). Firms receive an idiosyncratic productivity vector that is specified from a multivariate distribution and they also face distance related trade and MP costs. Thus, individual firms face a proximity—versus—comparative advantage trade-off to serve individual locations from close-by or high productivity locations. The model gives simple structural expressions for bilateral trade and MP. We use these expressions to calibrate the model across a set of OECD countries. We quantify the implications of openness to trade and MP on the allocation of employment between production and innovation, as well as the implications for wages, profits and overall welfare.

Date: 2011
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