International Trade with Indirect Additivity

67 Pages Posted: 15 Feb 2016 Last revised: 26 Jan 2022

See all articles by Paolo Bertoletti

Paolo Bertoletti

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Federico Etro

Ca Foscari University of Venice

Ina Simonovska

University of California - Davis; National Bureau of Economic Research (NBER)

Date Written: February 2016

Abstract

We develop a general equilibrium model of monopolistic competition and trade based on indirectly additive preferences and heterogenous firms. It generates markups independent from destination population but increasing in destination per capita income, as documented empirically. Trade liberalization delivers an increase in consumed variety and incomplete cost pass-through. This leads to welfare gains that can be much lower than those predicted by comparable models with different preferences. We introduce a tractable utility function that further predicts that small firms grow more during trade liberalization and pass through cost changes more than do large firms. Once we estimate the model to match moments from cross-firm and cross-country data we (i) find quantitatively large differences in the welfare gains from trade relative to models based on homothetic preferences, and (ii) evaluate the gains and losses from the Transatlantic Trade and Investment Partnership agreement.

Suggested Citation

Bertoletti, Paolo and Etro, Federico and Simonovska, Ina, International Trade with Indirect Additivity (February 2016). NBER Working Paper No. w21984, Available at SSRN: https://ssrn.com/abstract=2732461

Paolo Bertoletti (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Federico Etro

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Ina Simonovska

University of California - Davis ( email )

1 Shields Ave
Davis, CA 95616
United States

HOME PAGE: http://inasimonovska.weebly.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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