Global gains from reduction in trade costs

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

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    4 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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