American Economic Review Vol. 104 No. 5 2014

Welfare and Trade without Pareto

Keith Head¹; Thierry Mayer²; Mathias Thoenig³

¹ University of British Columbia, Sauder School of Business, 2053 Main Mall, Vancouver, B.C., V6T 1Z2, Canada, and CEPR (e-mail: ) · ² Sciences-Po, 28 rue des Saints-Pères, 75007 Paris, France, CEPII, and CEPR (e-mail: ) · ³ Faculty of Business and Economics, University of Lausanne, Bâtiment Extranef, 1015 Lausanne, Switzerland, and CEPR (e-mail: )

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.

DOI

10.1257/aer.104.5.310

Volume

104

Issue

5

Pages

310-316

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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