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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Gains from trade liberalization with flexible extensive margin adjustment
Organization Unit
  • Chang-Tai Hsieh
  • Nicholas Li
  • Ralph Ossa
  • Mu-Jeung Yang
  • English
Series Name SSRN
Number 3970457
ISSN 1556-5068
Number of Pages 49
Date 2021
Abstract Text We propose a new sufficient statistic to measure the ex-post welfare gains from trade in CES models featuring any productivity distribution or pattern of selection into production and exporting. Our statistic is based on a single data moment, the change in the market share of continuing domestic producers, and a single structural parameter, the elasticity of substitution between products. We apply our statistic to measure Canada's gains from the Canada-US Free Trade Agreement using data on observed firm selection and simulated firm selection in a calibrated model with a flexible extensive margin. We find that welfare gains are substantially smaller than implied by welfare formulas that assume that the extensive margin behaves according to a standard Melitz-Pareto model with iso-elastic import demand.
Official URL
Digital Object Identifier 10.2139/ssrn.3970457
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Keywords Trade, welfare, firms, selection, extensive margin, sufficient statistic, liberalization