Global gains from reduction in trade costs

Edwin L.C. Lai*, Haichao Fan, Steffan QI

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

We develop a simple formula for computing the global welfare effect of reduction in bilateral trade costs, such as shipping costs or the costs of administrative barriers to trade. The formula is applicable to a broad class of perfect competition and monopolistic competition models and settings, including perfect competition with multi-stage production and Melitz’s (Econometrica 71(6):1695–1725, 2003) model with general firm productivity distribution. We prove that the underlying mechanism is the envelope theorem. We then extend our analysis to models with non-constant markups. Finally, we carry out some empirical applications to show the user-friendliness of the formula.

Original languageEnglish
Pages (from-to)313-345
Number of pages33
JournalEconomic Theory
Volume70
Issue number1
DOIs
Publication statusPublished - 1 Jul 2020

Scopus Subject Areas

  • Economics and Econometrics

User-Defined Keywords

  • Gains from trade
  • Global welfare
  • Trade cost

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