TY  - JOUR
AU  - Lai,Huiwen
AU  - Trefler,Daniel
TI  - The Gains from Trade with Monopolistic Competition: Specification, Estimation, and Mis-Specification
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9169
PY  - 2002
Y2  - September 2002
UR  - http://www.nber.org/papers/w9169
L1  - http://www.nber.org/papers/w9169.pdf
N1  - Author contact info:
Daniel Trefler
Rotman School of Management
University of Toronto
105 St. George Street
Toronto, Ontario M5S 3E6  CANADA
Tel: 416/946-7945
Fax: 416/978-5433
E-Mail: dtrefler@rotman.utoronto.ca
AB  - The difficulty of incorporating general equilibrium price effects into econometric estimating equations has deterred most researchers from econometrically estimating the welfare gains from trade liberalization. Using a paired-down CES monopolistic competition example, we show that this difficulty has been greatly exaggerated. Along the way, we estimate   indeed precisely estimate large welfare gains from trade liberalization as measured by compensating variation. Unlike calibration methods, econometric methods allow researchers to isolate the violence done by the model to the data. We find that the CES monopolistic competition model horribly mis-specifies behavioural price elasticities and general equilibrium price feedbacks. The model as conceived is therefore of limited value for analysing the effects of trade liberalization. We report a number of specification issues that should point the way to better theoretical modeling.
ER  -