Discussion paper

DP9826 Welfare and Trade Without Pareto

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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Citation

Mayer, T and K Head (2014), ‘DP9826 Welfare and Trade Without Pareto‘, CEPR Discussion Paper No. 9826. CEPR Press, Paris & London. https://cepr.org/publications/dp9826