NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Policy under Firm-Level Heterogeneity in a Small Economy

Svetlana Demidova, Andrés Rodríguez-Clare

NBER Working Paper No. 13688
Issued in December 2007
NBER Program(s):   ITI

In this paper we explore the effect of trade policy on productivity and welfare in the now standard model of firm-level heterogeneity and product differentiation with monopolistic competition. To obtain sharp results, we restrict attention to an economy that takes as given the price of imports and the demand schedules for its exports (a "small economy"). We first establish that welfare can be decomposed into four terms: productivity, terms of trade, variety and curvature, where the latter is a term that captures heterogeneity across varieties. We then show how a consumption subsidy, an export tax, or an import tariff allow our small economy to deal with two distortions that we identify and thereby reach its first best allocation. We also show that an export subsidy generates an increase in productivity, but given the negative joint effect on the other three terms (terms of trade, variety and curvature), welfare falls. In contrast, an import tariff improves welfare in spite of the fact that productivity falls.

download in pdf format
   (289 K)

email paper

This paper is available as PDF (289 K) or via email.

This paper was revised on May 12, 2008

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13688

Published: Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June. citation courtesy of

Users who downloaded this paper also downloaded these:
Demidova and Rodriguez-Clare w17521 The Simple Analytics of the Melitz Model in a Small Open Economy
Cherkashin, Demidova, Kee, and Krishna w16557 Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments
Demidova and Krishna w12950 Firm Heterogeneity and Firm Behavior with Conditional Policies
Arkolakis, Demidova, Klenow, and Rodriguez-Clare w13933 Endogenous Variety and the Gains from Trade
Cherkashin, Demidova, Imai, and Krishna w13957 The Inside Scoop: Acceptance and Rejection at the Journal of International Economics
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us