Welfare and Trade Without Pareto

24 Pages Posted: 2 Jun 2014

See all articles by Keith Head

Keith Head

University of British Columbia (UBC) - Division of Strategy and Business Economics

Thierry Mayer

Sciences Po

Mathias Thoenig

University of Lausanne; Centre for Economic Policy Research (CEPR)

Date Written: February 2014

Abstract

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.

Keywords: Pareto, trade, welfare

JEL Classification: F1

Suggested Citation

Head, Keith and Mayer, Thierry and Thoenig, Mathias, Welfare and Trade Without Pareto (February 2014). CEPR Discussion Paper No. DP9826, Available at SSRN: https://ssrn.com/abstract=2444827

Keith Head (Contact Author)

University of British Columbia (UBC) - Division of Strategy and Business Economics ( email )

2053 Main Mall
Vancouver, British Columbia
Canada

HOME PAGE: http://strategy.sauder.ubc.ca/head/

Thierry Mayer

Sciences Po ( email )

Mathias Thoenig

University of Lausanne ( email )

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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