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Trade, Firm Selection and Innovation: The Competition Channel

Impullitti, Giammario; Licandro, Omar

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Abstract

We study the welfare gains from trade in an economy with heterogeneous firms, variable markups and endogenous growth. Variable markups arise from oligopolistic competition, and cost-reducing innovation is the engine of long-run growth. Trade liberalisation stiffens competition by reducing markups, generating tougher firm selection and increasing the aggregate productivity level. Selection increases firms’ incentives to innovate, thereby leading to a higher aggregate productivity growth rate. Endogenous productivity growth boosts the selection gains from trade, leading to substantial welfare improvements. A calibrated version of the model shows that growth doubles the welfare gains obtainable in models with static firm-level productivity.

Journal Article Type Article
Publication Date Feb 1, 2018
Journal The Economic Journal
Print ISSN 0013-0133
Electronic ISSN 1468-0297
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 128
Issue 608
Pages 189-229
APA6 Citation Impullitti, G., & Licandro, O. (2018). Trade, Firm Selection and Innovation: The Competition Channel. Economic Journal, 128(608), 189-229. https://doi.org/10.1111/ecoj.12466
DOI https://doi.org/10.1111/ecoj.12466
Keywords Endogenous Growth, Heterogeneous Firms, Oligopoly, Variable Markups, Dynamic Gains from Trade
Publisher URL http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12466/abstract
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf
Additional Information This is the peer reviewed version of the following article: Trade, Firm Selection and Innovation: The Competition Channel / Giammario Impullitti1, and Omar Licandro
Version of Record online: 7 AUG 2017, which has been published in final form at http://dx.doi.org/10.1111/ecoj.12466. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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