Firm Heterogeneity and the Two Sources of Gains from Trade
Title: Firm Heterogeneity and the Two Sources of Gains from Trade
Author: AGUR, Itai
Publisher: European University Institute
Series/Report no.: EUI ECO; 2006/38
Recent empirical work identies two main channels through which consumers benefit from trade. Trade liberalization lowers prices, while it raises product variety. This paper develops the first model that connects both channels and interprets their interaction. It shows that heterogeneity in firm productivity is the source behind both. Upon liberalization efficient exporters enter, pushing out the least efficient domestic firms. Two countervailing forces emerge, both stylized facts. Liberalization leaves a more concentrated market. But exporters offer more variety than the firms that they replace. Remarkably, total variety unambiguously increases. Exploration of comparative statics leads to an intuitive explanation.
Subject: Trade; Firm selection; Product Variety; Heterogeneous firms; F12; F15; L11
Type of Access: openAccess