Type
Article
Title
Welfare and Trade without Pareto
In
American Economic Review
Author(s)
HEAD Keith - Sauder School of Business (Author)
MAYER Thierry - Département d'économie (Author)
THOENIG Mathias - Centre Universitaire d'Informatique (Author)
Editor
US : American Economic Association
Volume
104
Number
5
Pages
310 - 316 p.
ISSN
00028282
DOI
http://dx.doi.org/10.1257/aer.104.5.310
Abstract
EN
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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