International Trade with Firm Heterogeneity in Factor Shares

Abstract

This paper presents a trade model with capital and labor as factors of production. The main contribution of this paper is that it considers a new type of firm heterogeneity, which is empirically relevant: firms in this paper differ with respect to their factor shares in production. Therefore, this paper is able to address the following four empirical facts on globalization, firms' factor shares and factor prices: (i) firms within narrowly defined industries exhibit a large degree of heterogeneity in factor shares in production; (ii) exporters are, on average, more capital intensive than non-exporters; (iii) globalization decreases labor's share in national income; (iv) the larger the share of exporters in the industry, the larger the increase in the industry's wages due to globalization.

Factor price overshooting with trade liberalization: theory and evidence

“…The dynamic model in this paper builds upon the intra‐industry trade framework in Emami Namini (), and we use it to examine the impact effect and the long–run effect of trade liberalization on relative wages. The model modifies the Krugman () setting of intra‐industry trade by incorporating ( i ) skilled and unskilled labor as factors of production, ( ii ) endogenous accumulation of skilled labor, ( iii ) CES production functions, and ( iv ) firm heterogeneity in factor intensities.…”

“…The only other papers that focus on firm heterogeneity in factor intensities – and abstract from heterogeneity in TFP or factor specific productivities – are Crozet and Trionfetti (), Emami Namini (), and Emami Namini et al . ().…”

“…(). While Crozet and Trionfetti () assume random factor share parameters and analyze how a firm's factor intensities interact with a country's relative factor endowments to determine the firm's market share, Emami Namini () assumes random factor share parameters and analyzes the growth impact of trade liberalization. Emami Namini et al .…”