Productivity and Firm Selection: Quantifying the ‘New’ Gains from Trade

Authors


  • Corresponding author: Giordano Mion, Department of Geography and Environment, LSE, Houghton Street, London WC2A 2AE. Email: G.Mion@lse.ac.uk.

  • We thank Pol Antràs, Stefano Breschi, Francesco Caselli, Armando Dominioni, Jonathan Eaton, Gino Gancia, Keith Head, Elhanan Helpman, Hubert Jayet, Samuel Kortum, Thierry Mayer, Michael Pfaffermayr, Eric Strobl, Silvana Tenreyro and Jaume Ventura for helpful comments and discussions, as well as seminar participants at Harvard University, the London School of Economics, University of Cagliari, University of Bologna, Bocconi University, Universitat Pompeu Fabra, Université Catholique de Louvain, Universidad de Vigo and conference participants to the 10th GTAP Conference at Purdue University, the 2008 ‘Annual Workshop on Trade and Productivity’ at CRENoS, the 2009 ETSG conference in Rome, the IME-ISGEP 2010 Workshop on Firm Selection and Country Competitiveness in Nice. The second author acknowledges financial support from the European Union under the FP7 SSH Project ‘Intangible Assets and Regional Economic Growth’ grant n. 216813. The fourth author acknowledges financial support from MIUR. Part of this research was done while the first author was visiting Harvard University, whose hospitality is gratefully acknowledged. Errors are ours.

Abstract

We discuss how standard computable equilibrium models of trade policy can be enriched with selection effects. This is achieved by estimating and simulating a partial equilibrium model that accounts for a number of real world effects of trade liberalisation: richer availability of product varieties; tougher competition and weaker market power of firms; better exploitation of economies of scale; and, of course, efficiency gains via firms selection. The model is estimated on EU data and then simulated in counterfactual scenarios. Gains from trade are much larger in the presence of selection effects with substantial variability across countries and sectors.

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