Trade Liberalization with Heterogeneous Firms

Abstract

This paper examines the various aspects of trade liberalization with heterogeneous firms using the Melitz (2003) model. We find a number of novel results and effects including a Stolper–Samuelson-like result and several results related to the volume of trade, which are empirically testable. We also analyze what might be called an anti-variety effect as the result of trade liberalization. We show that this effect is most pronounced for small countries. This resonates with the often voiced criticism from antiglobalists that globalization leads the world to become more homogeneous by eliminating local specialties. Nevertheless, we find that trade liberalization always leads to welfare gains in the model.