Efficiency gaps, love of variety and international trade

Research output: Contribution to journalArticle

Abstract

We develop a general equilibrium monopolistic competition model of trade with technical heterogeneity among firms and countries. With free entry, technical asymmetries between firms result in the endogenous determination of the equilibrium average efficiency of the industry. We show that trade reduces (increases) the minimum efficiency required to survive in the more (less) efficient country. This has important welfare implications: (1) Contrary to the constant elasticity of substitution homogeneous-firms model, trade affects welfare even when there is no love of variety. (2) There are circumstances in which trade liberalization leads to a loss of consumer welfare.
Original languageEnglish
Pages (from-to)27-44
Number of pages18
JournalEconomica
Volume68
Issue number269
DOIs
Publication statusPublished - 2001

Keywords

  • Monopolistic competition International trade Efficiency gaps

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