Pareto Distributions in International Trade: Hard to Identify, Easy to Estimate

45 Pages Posted: 5 Dec 2016

See all articles by Marnix Amand

Marnix Amand

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Florian Pelgrin

EDHEC Business School; EDHEC Business School

Date Written: November 13, 2016

Abstract

We show that, in heterogeneous-firm international trade models, common forms of heterogeneity and uncertainty drive a (multiplicative random) wedge between the observable exports distribution and the latent distribution of firm productivity. Even if the latter is exactly Pareto distributed, this wedge, correlated with firm productivity, distorts the exports data, often making it look log-normally distributed. We show this distortion to be quantitatively relevant, meaning that empirical evidence of a log-normal exports distribution does not preclude an underlying Pareto distribution for productivity. Furthermore, this wedge renders common maximum-likelihood and quantile-based estimators misspecified, hence inconsistent. We provide general conditions in a broad class of international trade models under which, despite this misspecification issue, the tail of the exports distribution can be used to estimate the power exponent of the productivity distribution consistently -- provided the sample size of left-truncated export data is large enough.

Keywords: Pareto, power law, international trade, productivity distribution, misspecification

JEL Classification: F12, F14

Suggested Citation

Amand, Marnix and Pelgrin, Florian, Pareto Distributions in International Trade: Hard to Identify, Easy to Estimate (November 13, 2016). Available at SSRN: https://ssrn.com/abstract=2879623 or http://dx.doi.org/10.2139/ssrn.2879623

Marnix Amand (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Florian Pelgrin

EDHEC Business School ( email )

France
Switzerland

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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