Trade and Selection with Heterogeneous Firms and Perfect Competition

29 Pages Posted: 14 Nov 2022 Last revised: 31 Mar 2024

See all articles by Xue Bai

Xue Bai

Brock University - Department of Economics

Arpita Chatterjee

UNSW Business School

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Hong Ma

Tsinghua University - School of Economics & Management

Date Written: November 2022

Abstract

This paper develops a new model with heterogeneous firms under perfect competition in a Heckscher-Ohlin-Samuelson setting. We show that trade need not make selection in the comparative advantage sector stricter as suggested by earlier work. Selection is driven by the capital intensity in entry costs relative to production costs. If trade raises (reduces) the wage rental ratio, and entry costs are more labor intensive than production costs in a sector, then the ratio of entry cost to production costs will rise (fall) and selection will become weaker (stricter) in this sector. Moreover, we show that the central theorems of the HOS model (as well as the standard generalizations using duality) carry over in our setting.

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Suggested Citation

Bai, Xue and Chatterjee, Arpita and Krishna, Kala and Ma, Hong, Trade and Selection with Heterogeneous Firms and Perfect Competition (November 2022). NBER Working Paper No. w30650, Available at SSRN: https://ssrn.com/abstract=4276111

Xue Bai (Contact Author)

Brock University - Department of Economics

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Arpita Chatterjee

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Kala Krishna

Pennsylvania State University - Department of Economics ( email )

523 Kern Graduate Building
University Park, PA 16802-3306
United States
814-865-1106 (Phone)
814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Hong Ma

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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