Welfare and Trade Without Pareto
Sciences Po Economics Discussion Papers
Sciences Po Economics Discussion Papers : 2014-02
This paper investigates the consequences of replacing the assumption of Pareto heterogeneity with log-normal heterogeneity. This case is interesting because it (a) maintains some desirable analytic features of Pareto, (b) ts the complete distribution of rm sales rather than just approximating the right tail, and (c) can be generated under equally plausible processes (see online appendix). The log-normal is reasonably tractable but its use sacrices some \scale-free" properties conveyed by the Pareto distribution. Aspects of the the calibration that do not matter under Pareto lead to important dierences in the gains from trade under log-normal.