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GTAP Resource #4456

"Firm Heterogeneity in Multiple Sector Models with Intermediate Linkages"
by Bekkers, Eddy and Joseph Francois

This paper introduces Melitz type firm heterogeneity in a general equilibrium model of trade with multiple sectors and intermediate linkages and productivity distributed according to a Pareto distribution. Industry equilibrium is characterized by two equations, a demand and price index equation, similar to the equations in a Krugman/Ethier economy and an Armington economy. It is shown that the equilibrium representation is similar to the equilibrium representation in the Krugman/Ethier economy with four differences. Relative to Krugman/Ethier sunk entry costs relative to the size parameter of the productivity distribution takes the place of fixed costs, a composite of iceberg and fixed trade costs takes the place of iceberg trade costs, the markup disappears from the pricing equation as a result of the endogeneity of cutoff productivity and the price index falls with market size in Melitz, since more firms can enter in a larger market.
The concised equilibrium representation enables a solution of the general equilibrium with firm heterogeneity in multiple sectors. This provides an extension relative to the current literature, since Hillberry, Rutherford and Tarr (2012) incorporate firm heterogeneity in a CGE model with firm heterogeneity only present in one sector with the other sectors characterized by Armington. The concised equilibrium representation also makes it easy to nest the Krugman/Ethier model as a special case of Melitz.
The model is calibrated to real world data employing GTAP data. Trade shares determine the composite of Armington shifters and composite trade costs. The model is programmed in GAMS, but can be rewritten into GEMPACK. The impact of tariff liberalization in the Melitz firm heterogeneity economy is compared with the impact in an Armington and a Krugman/Ethier economy....

Resource Details (Export Citation) GTAP Keywords
Category: 2014 Conference Paper
Status: Published
By/In: Presented at the 17th Annual Conference on Global Economic Analysis, Dakar, Senegal
Date: 2014
Created: Bekkers, E. (4/15/2014)
Updated: Batta, G. (4/15/2014)
Visits: 2,587
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