DP9826 Welfare and Trade Without Pareto
|Author(s):||Keith Head, Thierry Mayer, Mathias Thoenig|
|Publication Date:||February 2014|
|Keyword(s):||Pareto, trade, welfare|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9826|
Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions?especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two country model that can be twice as large as under the Pareto assumption.