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The Interaction Between Technology Adoption and Trade When Firms are Heterogeneous


  • I thank Areendam Chanda, Svetlana Demidova, Elias Dinopoulos, Naci Mocan, Mehmet Yorukoglu, Tao Zha, and seminar participants at the Atlanta Fed, the Central Bank of Turkey, and Louisiana State University for helpful comments and suggestions. I also thank two anonymous referees for their valuable suggestions.


This paper develops a monopolistic competition model with heterogeneous firms to study the interaction between technology adoption and trade in a world of two countries facing different technology adoption costs. It shows that a reduction in the technology adoption cost in one country increases productivity, induces more firms to adopt advanced technology, and improves welfare in this country, while decreasing productivity, inducing more firms to switch back to old technology, and reducing welfare in the other country. Furthermore, although a reduction in transport costs always makes the country with the lower adoption cost better off, it can hurt the other country.