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  1. Home
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  3. American Economic Review
  4. May 2014
  5. Welfare and Trade without Pareto

Welfare and Trade without Pareto

  • Keith Head
  • Thierry Mayer
  • Mathias Thoenig
American Economic Review
vol. 104, no. 5, May 2014
(pp. 310-16)
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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.

Citation

Head, Keith, Thierry Mayer, and Mathias Thoenig. 2014. "Welfare and Trade without Pareto." American Economic Review, 104 (5): 310-16. DOI: 10.1257/aer.104.5.310

Additional Materials

JEL Classification

  • C46 Specific Distributions; Specific Statistics
  • D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
  • D43 Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
  • D60 Welfare Economics: General
  • L13 Oligopoly and Other Imperfect Markets
  • L25 Firm Performance: Size, Diversification, and Scope