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Reallocation gains in a specific factors model with firm heterogeneity

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  • Eddy Bekkers
  • Robert Stehrer

Abstract

We study firm heterogeneity in a specific factors model to address the effect of factor mobility on reallocation gains from trade. A model is proposed with Melitz type firm heterogeneity with two sectors, two countries and two fixed factors and one factor mobile across sectors. Equilibrium in each sector can be concisely represented by a demand and supply equation and a FE and ZCP condition. Varying the substitution elasticity between the fixed and mobile factor we show that the welfare gains from trade liberalization are larger in countries with a lower substitution elasticity. Furthermore, it is shown that the immobile production factor in the comparative disadvantage sector can still gain from trade liberalization due to the reallocation effect.

Suggested Citation

  • Eddy Bekkers & Robert Stehrer, 2011. "Reallocation gains in a specific factors model with firm heterogeneity," Economics working papers 2011-15, Department of Economics, Johannes Kepler University Linz, Austria.
    • Handle: RePEc:jku:econwp:2011_15
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    References listed on IDEAS

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    More about this item

    Keywords

    Firm heterogeneity; Specific Factors; Reallocation Gains from Trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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