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Welfare and Trade without Pareto

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.
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Submitted on : Wednesday, December 1, 2021 - 9:05:41 AM
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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⟩



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