Welfare and Trade without Pareto

Keith Head (1) , Thierry Mayer (2) , Mathias Thoenig (3)

1 Sauder - Sauder School of Business [British Columbia]
2 ECON - Département d'économie (Sciences Po)
3 CUI - Centre Universitaire d'Informatique

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.

Keywords: Welfare Theory; Trade Models; Microdata Simulations

Domains: Humanities and Social Sciences; Economics and Finance

Keith Head, Thierry Mayer, Mathias Thoenig. Welfare and Trade without Pareto. American Economic Review, 2014, 104 (5), pp.310 - 316. ⟨10.1257/aer.104.5.310⟩. ⟨hal-03460459⟩