Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/72219
Authors: 
Cole, Matthew T.
Year of Publication: 
2011
Series/Report no.: 
Working Paper Series, UCD Centre for Economic Research 11/05
Abstract: 
Since firm heterogeneity has been introduced into international trade models, the importance of firm entry and exit (the extensive margin) has been highlighted. In fact, Chaney (2008) illustrates how accounting for this extensive margin and heterogenous firms alters the standard gravity equation; thereby reversing the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Furthermore, Cole (forthcoming) points out that ad valorem tariffs affect the extensive margin quite differently than the commonly used iceberg transport cost. In this paper, I show that the elasticity of trade flows with respect to tariffs is more elastic than that of iceberg transport costs. Thus, elasticity estimates derived from variables such as distance may underestimate the effect caused by a change in tariffs.
Subjects: 
Intra-industry Trade
Gravity
Firm heterogeneity
Monopolistic competition
JEL: 
F12
F13
F17
Document Type: 
Working Paper

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