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Welfare and Trade without Pareto

Keith Head, Thierry Mayer () and Mathias Thoenig ()

Sciences Po publications from Sciences Po

Abstract: Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions-especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two-country model that can be twice as large as under the Pareto assumption.

Keywords: Welfare Theory; Trade Models; Microdata Simulations (search for similar items in EconPapers)
JEL-codes: C46 D24 D43 D60 L13 L25 (search for similar items in EconPapers)
Date: 2014-05
References: View references in EconPapers View complete reference list from CitEc
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Published in American Economic Review, 2014, vol. 104, pp.310-316

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Working Paper: Welfare and Trade Without Pareto (2014) Downloads
Working Paper: Welfare and Trade Without Pareto (2014) Downloads
Working Paper: Welfare and Trade Without Pareto (2014) Downloads
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