Theories of Heterogeneous Firms and Trade
This paper reviews the recent theoretical literature on heterogeneous firms and trade, which emphasizes firm selection into international markets and reallocations of resources across firms. We discuss the empirical challenges that motivated this research and its relationship to traditional trade theories. We examine the implications of firm heterogeneity for comparative advantage, market size, aggregate trade, the welfare gains from trade, and the relationship between trade and income distribution. While a number of studies examine the endogenous response of firm productivity to trade liberalization, modelling internal firm organization and the origins of firm heterogeneity remain interesting areas of ongoing research.
August 2010 Paper Number CEPDP0994
This CEP discussion paper is published under the centre's Trade programme.