Trade Models, Trade Elasticities, and the Gains from Trade
We argue that the welfare gains from trade in new models with micro-level margins exceed those in frameworks without these margins. Theoretically, we show that for fixed trade elasticity, different models predict identical trade flows, but different patterns of micro-level price variation. Thus, given data on trade flows and micro-level prices, different models have different implied trade elasticities and welfare gains. Empirically, models with extensive or variable mark-up margins yield significantly larger welfare gains. The results are robust to incorporating into the estimation moment conditions that use trade-flow and tariff data, which imply a common trade elasticity across models.
We thank seminar participants at NBER ITI Summer Institute, Ca' Foscari, Rochester and Brown. A very preliminary version of this paper circulated under the title "Different Trade Models, Different Trade Elasticities?" The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.