Efficiency in International Trade with Firm Heterogeneity and Networks

Abstract

This paper examines integrated effects of firm heterogeneity and communication network services on international trade. Patterns and effects of trade are analyzed in a general equilibrium model where firms with different productivity levels share among them the cost of network services and compete in a monopolistically competitive market for a differentiated good. The paper reveals that the more efficient country in the production of the differentiated good is not always the net exporter of the good. The less efficient country also has the chance to expand the industry and then to become the net exporter in this intra-industry trade due to the combination of the efficiency effect induced by firm heterogeneity and the cost-sharing effect by the existence of the network service industry. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.

Firm Entry under Financial Frictions

“…By doing so, they are able to replicate stylized facts such as the procyclicality of firm entry and profits and the countercyclicality of mark-ups. The framework of heterogenous firms, monopolistic competition and firm creation has been used to study international trade (Hiep and Ohta, 2007;Baldwin and Forslid, 2010). In addition, a sticky-price version has been developed in papers by Bergin and Corsetti (2008), Bilbiie et al (2008), and Lewis (2009) to conduct business cycle and monetary policy analysis.…”

Occupational Choice, Aggregate Productivity, and Trade

“…Chaney (2008) and Do and Levchenko (2009), e.g., replace Melitz's modelling of a dynamic market-entry game with an infinite mass of entrants by assuming a fixed number of firms that are either active or inactive. Their simpli-1 The Melitz model has been successfully extended by introducing specific institutions (Hiep and Hiroshi, 2007) or special characteristics of product markets (Melitz and Ottaviano, 2008;Arkolakis, 2011) or labor markets (Helpman and Itshoki, 2010;Egger and Kreickemeier, 2009). All of these extensions, however, typically postulate a specific distribution of firm productivities in order to reconcile the implications of their models with observed productivity distributions.…”

Occupational Choice, Aggregate Productivity, and Trade

“…The Melitz model has been successfully extended by introducing specific institutions (Hiep and Hiroshi, ) or special characteristics of product markets (Melitz and Ottaviano, ; Arkolakis, ) or labor markets (Helpman and Itskhoki, ; Egger and Kreickemeier, ). All of these extensions, however, typically postulate a specific distribution of firm productivities in order to reconcile the implications of their models with observed productivity distributions.…”