Trade and Welfare: Does Industrial Organization Matter

CER-ETH - Center of Economic Research at ETH Zurich Working Paper No. 09/119

13 Pages Posted: 29 Sep 2009

See all articles by Edward J. Balistreri

Edward J. Balistreri

Iowa State University

Russell H. Hillberry

University of Melbourne - Department of Economics; World Bank - Development Research Group (DECRG)

Thomas F. Rutherford

Centre for Energy Policy and Economics

Date Written: September 1, 2009

Abstract

Many contemporary theoretic studies of trade over geography reduce to an examination of constant-elasticity reactions to changes in iceberg trade costs. These impacts are readily analyzed in simple constant-returns models based on the Armington (1969) assumption of regionally differentiated goods. Following the line of reasoning suggested by Arkolakis et al. (2008) one can reach the surprising conclusion that industrial organization does not matter. In the present paper, we show that this finding is fragile, and with a minor elaboration of their model, the rich industrial-organization features of the popular Melitz (2003) model do, in fact, generate important differences for trade and welfare.

Keywords: Variety effects, Heterogeneous firms, Gains from trade

JEL Classification: F1

Suggested Citation

Balistreri, Edward J. and Hillberry, Russell H. and Rutherford, Thomas F., Trade and Welfare: Does Industrial Organization Matter (September 1, 2009). CER-ETH - Center of Economic Research at ETH Zurich Working Paper No. 09/119, Available at SSRN: https://ssrn.com/abstract=1479612 or http://dx.doi.org/10.2139/ssrn.1479612

Edward J. Balistreri (Contact Author)

Iowa State University ( email )

260 Heady Hall
Ames, IA 50011
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3032531674 (Phone)

Russell H. Hillberry

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Thomas F. Rutherford

Centre for Energy Policy and Economics ( email )

ETH-Zentrum
Zurich, CH-8092
United States
+41 (0)44/632 6359 (Phone)
+41 (0)44/632 1622 (Fax)

HOME PAGE: http://www.cepe.ethz.ch/

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