New Trade Models, New Welfare Implications

40 Pages Posted: 22 Mar 2013 Last revised: 13 Mar 2022

See all articles by Marc J. Melitz

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Stephen J. Redding

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

We show that endogenous firm selection provides a new welfare margin for heterogeneous firm models of trade (relative to homogeneous firm models). Under some parameter restrictions, the trade elasticity is constant and is a sufficient statistic for welfare, along with the domestic trade share. However, even small deviations from these restrictions imply that trade elasticities are variable and differ across markets and levels of trade costs. In this more general setting, the domestic trade share and endogenous trade elasticity are no longer sufficient statistics for welfare. Additional empirically observable moments of the micro structure also matter for welfare.

Suggested Citation

Melitz, Marc J. and Melitz, Marc J. and Redding, Stephen J., New Trade Models, New Welfare Implications (March 2013). NBER Working Paper No. w18919, Available at SSRN: https://ssrn.com/abstract=2237831

Marc J. Melitz (Contact Author)

Centre for Economic Policy Research (CEPR)

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Harvard University - Department of Economics ( email )

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Stephen J. Redding

Princeton University ( email )

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