CEPII, Recherche et Expertise sur l'economie mondiale
From Micro to Macro: Demand, Supply, and Heterogeneity in the Trade Elasticity

Maria Bas
Thierry Mayer
Mathias Thoenig

 Highlights :
  • We show that heterogeneity in firm performance generates heterogeneous aggregate trade elasticities under distributions other than the Pareto
  • We estimate firm-level trade elasticity to tariffs, with an average value around -5
  • Predictions of the model with a log-normal distribution dominate predictions arising with Pareto

 Abstract :
Models of heterogeneous firms with selection into export market participation generically exhibit aggregate trade elasticities that vary across country-pairs. Only when heterogeneity is assumed Pareto-distributed do all elasticities collapse into an unique elasticity, estimable with a gravity equation. This paper provides a theory-based method for quantifying country-pair specific elasticities when moving away from Pareto, i.e. when gravity does not hold. Combining two firm-level customs datasets for which we observe French and Chinese individual sales on the same destination market over the 2000-2006 period, we are able to estimate all the components of the dyadic elasticity: i) the demand-side parameter that governs the intensive margin and ii) the supply side parameters that drive the extensive margin. These components are then assembled under theoretical guidance to calculate bilateral aggregate elasticities over the whole set of destinations, and their decomposition into different margins. Our predictions fit well with econometric estimates, supporting our view that micro-data is a key element in the quantification of non-constant macro trade elasticities.

 Keywords : trade elasticity | firm-level data | heterogeneity | gravity | Pareto | log-normal

 JEL : F21
CEPII Working Paper
N°2015-07, June 2015

Full text

BibTeX (with abstract),
plain text (with abstract),
RIS (with abstract)

 Fields of expertise

Trade & Globalization