Structural Estimation and Solution of International Trade Models with Heterogeneous Firms

Abstract

We present an empirical implementation of a general-equilibrium model of international trade with heterogeneous manufacturing firms. The theory underlying our model is consistent with Melitz (2003). A nonlinear structural estimation procedure identifies a set of core parameters and unobserved firm-level trade frictions that best fit the geographic pattern of trade. Once the parameters are identified, we utilize a decomposition technique for computing general-equilibrium counterfactuals. We first assess the economic effects of reductions in measured tariffs. Taking the simple-average welfare change across regions the Melitz structure indicates welfare gains from liberalization that are nearly four times larger than in a standard trade policy simulation. Furthermore, when we compare the economic impact of tariff reductions with reductions in estimated fixed trade costs we find that policy measures affecting the fixed costs are of greater importance than tariff barriers. (JEL C68,F12)

GTAP-HET: Introducing Firm Heterogeneity into the GTAP Model

“…In related work, welfare changes in the Melitz (2003) model are found to be larger than an Armington (1969) benchmark (Balistreri, Hillberry, and Rutherford, 2011;Kancs, 2010;Zhai, 2008). In fact, incorporating firm heterogeneity into standard CGE models raises the gains from trade liberalization by a multiple of two in Zhai (2008) and by a multiple of four in Balistreri, Hillberry, and Rutherford (2011).…”

“…In fact, incorporating firm heterogeneity into standard CGE models raises the gains from trade liberalization by a multiple of two in Zhai (2008) and by a multiple of four in Balistreri, Hillberry, and Rutherford (2011). However, Arkolakis et al (2008) and Arkolakis, Costinot, and RodriguezClare (2012) argue that the impact of trade cost reductions is similar across models once their trade responses are equalized via the calibration of parameters.…”

“…There have recently been some important efforts to incorporate Melitz (2003) into global CGE modeling (Zhai, 2008;Balistreri, Hillberry, and Rutherford, 2011;Balistreri and Rutherford, 2013;Oyamada, 2014;Dixon, Jerie, and Rimmer, 2015). However, a readily accessible Global Trade Analysis Project (GTAP) implementation with firm heterogeneity has not yet become available.…”

“…In particular, firms vary by their productivity, size, profitability, the number of markets served and responses to trade shocks (Bernard et al, 2003;Eaton, Kortum, and Kramarz, 2004;Bernard et al, 2007;Balistreri, Hillberry, and Rutherford, 2011;Melitz and Trefler, 2012). Moreover, only a small proportion of firms export and they tend to be larger and more productive than non-exporters (Balistreri, Hillberry, and Rutherford, 2011;Bernard et al, 2003;Bernard and Jensen, 1999).…”

Domestic productivity and variety gains from trade

“…The underlying assumption is that export performance is highly correlated with domestic productivity: a country with a productive industry participates in the world market, and the more productive the industry, the more it exports worldwide (as in Melitz 2003). At the micro level, the assumption is supported by the empirical literature on firm level heterogeneity (Bernard et al 2003).…”