A parsimonious approach to incorporate firm heterogeneity in cge-models

Bekkers, Eddy Henricus; Francois, Joseph (2018). A parsimonious approach to incorporate firm heterogeneity in cge-models. Journal of Global Economic Analysis, 3(2), pp. 1-68. Center for Global Trade Analysis 10.21642/JGEA.030201AF

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This paper proposes a parsimonious and intuitive way to incorporate Melitz-type firm heterogeneity in a CGE-model based on the conventional Armington trade structure. The Armington trade structure is extended with demand, supply, and trade cost shifters. Each sector can be modelled as either Melitz, Ethier-Krugman, or Armington, depending on the specification chosen for the shifters. The trade structure of the model can be calibrated based on two estimable parameters: the trade or tariff elasticity and the shape parameter of the size distribution of firms. With this setup fixed and iceberg trade costs are calibrated jointly based on observed import shares. The structure is incorporated within the standard GTAP model and changes to the GEMPACK code are discussed in detail. Changes in both trade values and welfare are decomposed. Experiments with global reductions in iceberg and fixed trade costs are simulated in a medium-size model with 11 countries, 11 sectors, and 6 production factors. The experiments show that the welfare effects are largest under Melitz, followed by Ethier-Krugman and Armington, although differences are modest.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Other Institutions > Teaching Staff, Faculty of Business, Economics and Social Sciences
02 Faculty of Law > Department of Economic Law > World Trade Institute
10 Strategic Research Centers > World Trade Institute

02 Faculty of Law > Department of Economic Law > NCCR International Trade Regulation
03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Bekkers, Eddy Henricus and Francois, Joseph

Subjects:

300 Social sciences, sociology & anthropology > 340 Law
300 Social sciences, sociology & anthropology > 380 Commerce, communications & transportation
300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

2377-2999

Publisher:

Center for Global Trade Analysis

Language:

English

Submitter:

Rebecca Anne Gilgen

Date Deposited:

13 Feb 2019 14:39

Last Modified:

13 Feb 2019 14:39

Publisher DOI:

10.21642/JGEA.030201AF

BORIS DOI:

10.7892/boris.126104

URI:

https://boris.unibe.ch/id/eprint/126104

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