The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

46 Pages Posted: 25 Jun 2002

See all articles by Marc J. Melitz

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002

Abstract

This Paper builds a dynamic industry model with heterogeneous firms that explains why international trade induces reallocations of resources among firms in an industry. The Paper shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. These phenomena have been empirically documented but cannot be explained by current general equilibrium trade models, because they rely on a representative firm framework. The Paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The Paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the Paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.

Keywords: Intra-industry trade, size distribution of firms

JEL Classification: F12, L11

Suggested Citation

Melitz, Marc J. and Melitz, Marc J., The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity (May 2002). Available at SSRN: https://ssrn.com/abstract=317300

Marc J. Melitz (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
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617-495-8297 (Phone)
617-417-6536 (Fax)

National Bureau of Economic Research (NBER)

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