International Trade with Indirect Additivity / Paolo Bertoletti, Federico Etro, Ina Simonovska.

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Bertoletti, Paolo

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w21984.Publication details: Cambridge, Mass. National Bureau of Economic Research 2016.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We develop a general equilibrium model of monopolistic competition and trade based on indirectly additive preferences and heterogenous firms. It generates markups independent from destination population but increasing in destination per capita income, as documented empirically. Trade liberalization delivers an increase in consumed variety and incomplete cost pass-through. This leads to welfare gains that can be much lower than those predicted by comparable models with different preferences. We introduce a tractable utility function that further predicts that small firms grow more during trade liberalization and pass through cost changes more than do large firms. Once we estimate the model to match moments from cross-firm and cross-country data we (i) find quantitatively large differences in the welfare gains from trade relative to models based on homothetic preferences, and (ii) evaluate the gains and losses from the Transatlantic Trade and Investment Partnership agreement.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w21984 (Browse shelf(Opens below))	Not For Loan

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February 2016.

We develop a general equilibrium model of monopolistic competition and trade based on indirectly additive preferences and heterogenous firms. It generates markups independent from destination population but increasing in destination per capita income, as documented empirically. Trade liberalization delivers an increase in consumed variety and incomplete cost pass-through. This leads to welfare gains that can be much lower than those predicted by comparable models with different preferences. We introduce a tractable utility function that further predicts that small firms grow more during trade liberalization and pass through cost changes more than do large firms. Once we estimate the model to match moments from cross-firm and cross-country data we (i) find quantitatively large differences in the welfare gains from trade relative to models based on homothetic preferences, and (ii) evaluate the gains and losses from the Transatlantic Trade and Investment Partnership agreement.