Trade Integration, Firm Selection and the Costs of Non-Europe

36 Pages Posted: 16 Aug 2006

See all articles by Massimo Del Gatto

Massimo Del Gatto

CRENOS - Centre for North South Economic Research; 'Gabriele d'Annunzio' University of Chieti-Pescara - Faculty of Economics

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Giordano Mion

University of Sussex - Department of Economics; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: June 2006

Abstract

In models with heterogeneous firms trade integration has a positive impact on aggregate productivity through the selection of the best firms as import competition drives the least productive ones out of the market. To quantify the impact of firm selection on productivity, we calibrate and simulate a multi-country multi-sector model with monopolistic competition and variable markups using firm-level data and aggregate trade figures on a panel of 11 EU countries. We find that EU trade has a sizeable impact on aggregate productivity. In 2000 the introduction of prohibitive trade barriers would have caused an average productivity loss of roughly 13 per cent, whereas a reduction of intra-EU trade costs by 5 per cent would have generated a productivity gain of roughly 2 per cent. Productivity losses and gains, however, vary a lot across countries and sectors depending on market accessibility and trade costs. We provide evidence that our results are robust to alternative distance and productivity measures.

Keywords: European integration, firm-level data, firm selection, gains from trade, total factor productivity

JEL Classification: F12, R13

Suggested Citation

Del Gatto, Massimo and Del Gatto, Massimo and Ottaviano, Gianmarco I.P. and Mion, Giordano, Trade Integration, Firm Selection and the Costs of Non-Europe (June 2006). CEPR Discussion Paper No. 5730, Available at SSRN: https://ssrn.com/abstract=924430

Massimo Del Gatto

CRENOS - Centre for North South Economic Research ( email )

Cagliari
Italy

'Gabriele d'Annunzio' University of Chieti-Pescara - Faculty of Economics ( email )

Faculty of Economics - Department of Economics
Viale Pindaro, 42
Pescara, 65127
Italy

Gianmarco I.P. Ottaviano (Contact Author)

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

Giordano Mion

University of Sussex - Department of Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://sites.google.com/site/giordanomionhp/

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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