New Trade Models, New Welfare Implications
NBER Working Paper No. 18919
We examine whether firm heterogeneity matters for the aggregate welfare implications of trade by comparing heterogeneous and homogeneous firm models. We show that the endogenous entry/ exit decisions of firms into/out of the domestic and export market provide a new channel for welfare gains that is absent from models without firm heterogeneity. We use a theoretical comparative static to isolate the additional component of welfare associated with this channel and to show that models of firm heterogeneity have new aggregate welfare implications. We express the welfare gains from trade in the heterogeneous and homogeneous firm models in terms of observable empirical moments. We show that in the general cases of these models the aggregate domestic trade share and trade elasticity are not sufficient statistics for welfare.
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An online appendix is available for this publication.
This paper was revised on February 7, 2014
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