The choice of modeling firm heterogeneity and trade restrictions

Matthew Cole

No 200920, Working Papers from School of Economics, University College Dublin

Abstract: There has been great focus in the recent trade theory literature on the introduction of firm heterogeneity into trade models. However, these models tend to rely heavily on symmetry assumptions and assume melting iceberg transport costs as the only form of trade restrictions. Moreover, a standard assumption is that firms differ across marginal cost, yet empirical evidence suggests this is not the only important source of heterogeneity. I provide a highly tractable model, in which firms differ across fixed costs, that qualitatively maintains the main results of these models, but allows for asymmetric changes in trade restrictions, a necessary step towards studying strategic trade policy. In addition, I highlight the differences in the effects on product variety associated with changes in an ad valorem tariff, iceberg transport costs, and additional beachhead costs to become an exporter. This is important as there are potential offsetting effects on firm entry.

Keywords: Intra-industry trade; Trade policy; Firm heterogeneity; Monopolistic competition; Intra-industry trade--Econometric models; Commercial policy; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: F10 F13 F15 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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