Granular Comparative Advantage
64 Pages Posted: 16 Jul 2018 Last revised: 14 Oct 2021
Date Written: July 2018
Large firms play a pivotal role in international trade, shaping the export patterns of countries. We propose and quantify a granular multi-sector model of trade, which combines fundamental comparative advantage across sectors with granular comparative advantage embodied in outstanding individual firms. We develop an SMM-based estimation procedure, which takes full account of the general equilibrium of the model, to jointly estimate these fundamental and granular forces using French micro-data with information on firm domestic and export sales across manufacturing industries. We find that granularity accounts for about 20% of the variation in realized export intensity across sectors, and is more pronounced in the most export-intensive sectors. In turn, idiosyncratic firm dynamics accounts for a large share of the evolution of a country's comparative advantage over time. Governments face strong incentives to target trade policy at large individual foreign exporters, and to use lenient antitrust regulation at home to substitute for beggar-thy-neighbor trade policy.
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