Functional Forms for Tractable Economic Models and the Cost Structure of International Trade

Abstract

We present functional forms allowing a broader range of analytic solutions to common economic equilibrium problems. These can increase the realism of pen-and-paper solutions or speed large-scale numerical solutions as computational subroutines. We use the latter approach to build a tractable heterogeneous firm model of international trade accommodating economies of scale in export and diseconomies of scale in production, providing a natural, unified solution to several puzzles concerning trade costs. We briefly highlight applications in a range of other fields. Our method of generating analytic solutions is a discrete approximation to a logarithmically modified Laplace transform of equilibrium conditions. Supplementary material for this paper is available at the following URL: http://ssrn.com/abstract=2575471

Keywords: Tractability, closed-form solutions, Laplace transform, international trade, trade cost puzzle, supply-chain bargaining, labor bargaining, monopolistic competition

JEL Classification: C63, C68, D40, D58, E24, F11, H22, L10