American Economic Review: Vol. 104 No. 5 (May 2014)


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Welfare and Trade without Pareto

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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


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.

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Head, Keith (U British Columbia)
Mayer, Thierry (Sciences Po, Paris and CEPII, Paris)
Thoenig, Mathias (U Lausanne)

JEL Classifications

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

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