Trade, Firm Selection and Innovation: The Competition Channel

Impullitti, Giammario; Licandro, Omar

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
• 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
• DOI: https://doi.org/10.1111/ecoj.12466
• Keywords: Endogenous Growth, Heterogeneous Firms, Oligopoly, Variable Markups, Dynamic Gains from Trade
• Public URL: https://nottingham-repository.worktribe.com/output/962762
• Publisher URL: http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12466/abstract
• 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.