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Trade, Firm Selection and Innovation: The Competition Channel

Impullitti, Giammario; Licandro, Omar

Trade, Firm Selection and Innovation: The Competition Channel Thumbnail


Omar Licandro


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
Acceptance Date Jan 12, 2017
Online Publication Date Aug 7, 2017
Publication Date Feb 1, 2018
Deposit Date Oct 4, 2017
Publicly Available Date Aug 8, 2019
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
Keywords Endogenous Growth, Heterogeneous Firms, Oligopoly, Variable Markups, Dynamic Gains from Trade
Public URL
Publisher URL
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 This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.


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