Welfare and Trade without Pareto
Keith Head, Thierry Mayer, Mathias Thoenig
American Economic Review · 2014 · Volume 104 · Issue 5
Abstract
Quantifications of gains from trade in heterogeneous firm models assume that productivity is Pareto distributed. Replacing this assumption with log-normal heterogeneity retains some useful Pareto features, while providing a substantially better fit to sales distributions-especially in the left tail. The cost of log-normal is that gains from trade depend on the method of calibrating the fixed cost and productivity distribution parameters. When set to match the size distribution of firm sales in a given market, the log-normal assumption delivers gains from trade in a symmetric two-country model that can be twice as large as under the Pareto assumption.
Keywords
Specific Distributions, Specific Statistics, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection, Welfare Economics: General, Oligopoly and Other Imperfect Markets, Firm Performance: Size, Diversification, and Scope
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