Trade, firm selection, and innovation: the competition channel

Giammario Impullitti and Omar Licandro

Assessing the size and identifying the sources of gains from trade is a long standing challenge for economists. In the last decades, a new line of research introducing firm heterogeneity in trade models has highlighted the possibility of a new source of welfare gains. Trade-induced reallocations of market shares from low to highly productive firms leads to improvements in aggregate productivity and to potentially large welfare gains. Theoretical and quantitative analyses assessing the contribution of the 'selection margin' to welfare gains from trade have mainly featured market structures with perfect or monopolistic competition, focused on static models, or on dynamic economies without long-run productivity growth.

In this Nottingham School of Economics working paper, published in the Economic Journal, Giammario Impullitti and Omar Licandro aim to fill these gaps by providing a theory of trade with heterogeneous firms under oligopolistic competition and innovation-driven productivity growth. A quantitative version of the model shows that trade leads to substantial welfare gains, about half of which are accounted for by the effect of selection on productivity growth. Dynamic gains due to the growth effects of selection double the welfare gains from selection obtainable in a static version of the economy.

Economic Journal, "Trade, firm selection, and innovation: the competition channel", by Giammario Impullitti and Omar Licandro.

View all featured publications