CEPII, Recherche et Expertise sur l'economie mondiale
Love of Variety and Gains from Trade

Christophe Gouel
Sébastien Jean

 Points clés :
  • In standard modeling practices, the love-of-variety elasticity is determined by the elasticity of substitution between varieties which prevents researchers from understanding its role independently from product substitutability.
  • We develop a multi-country, multi-sector gravity trade model where these two elasticities are parameterized separately and show analytically how gains from trade depend upon love of variety.
  • Counterfactual simulations show that the love-of-variety elasticity is a key determinant of the gains from trade, an aspect that has been so far overlooked in the literature.

 Résumé :
This paper shows how gains from trade are conditioned by love of variety, defined as the extent to which an additional product variety generates benefits in either final or intermediate consumption. We develop a multi-country, multisector gravity trade model where love of variety is parameterized separately from product substitutability using a generalized CES demand function, and show analytically how gains from trade depend on love of variety through different channels that we identify and interpret. In this context, except for very specific parameterizations, gains from trade differ between a heterogeneous- and a homogeneous-firm model. Counterfactual simulations based on a calibrated version of this model show that, all other things being equal, the assessed gains from trade commonly vary by a proportion of one to three depending on the value of the love-of-variety elasticity, in a way that differs significantly across countries. Trade war simulations also point to the strong sensitivity of the assessed impacts. We conclude that love of variety is a key determinant of the gains from trade, an aspect that has so far been overlooked for the sake of convenience in the modeling framework and due to lack of empirical estimates.

 Mots-clés : International Trade | Firm Heterogeneity | Gains from Trade | Gravity | Love of Variety

 JEL : F11, F12, F13
CEPII Working Paper
N°2021-09, December 2021

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 Domaines d'expertise

Commerce & Mondialisation