Innovation, firm size distribution, and gains from trade

Author

Yi-Fan CHEN, Academia Sinica
Wen-Tai HSU, Singapore Management UniversityFollow
Shin-Kun PENG, Academia Sinica

Publication Type

Working Paper

Version

publishedVersion

Publication Date

9-2018

Abstract

We study a trade model with monopolistic competition a la Melitz (2003) that is standard except that firm heterogeneity is endogenously determined by firms innovating to enhance their productivities. We show that the equilibrium productivity and firm-size distributions exhibit power-law tails under rather general conditions on demand and technology. In particular, the emergence of the power laws is essentially independent of the underlying primitive heterogeneity among firms. We investigate the model’s welfare implications, and conduct a quantitative analysis of welfare gains from trade. We find that, conditional on the same trade elasticity and values of the common parameters, our model yields 40% higher welfare gains from trade than a standard model with exogenously given productivity distribution.

Keywords

Innovation, Power law, Regular variation, Welfare gains from trade, Firm heterogeneity.

Discipline

Growth and Development | Income Distribution | Technology and Innovation

Research Areas

Applied Microeconomics

First Page

1

Last Page

53

Publisher

SMU Economics and Statistics Working Paper Series, No. 17-2018

City or Country

Singapore

Citation

CHEN, Yi-Fan; HSU, Wen-Tai; and PENG, Shin-Kun. Innovation, firm size distribution, and gains from trade. (2018). 1-53.
Available at: https://ink.library.smu.edu.sg/soe_research/2196

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.