Thierry Mayer, Professor at the department of Economics, Sciences Po, has received the very selective starting grant of the European Research Council (ERC) for his 5-year project HETMAT: Heterogeneity that Matters for Welfare and Trade.
Accounting for firms’ heterogeneity in trade patterns is probably the most important innovation of the field of international trade that occurred during the last decade. The impact of initial papers such as Melitz (2003) for theory and Bernard and Jensen (1999) for the empirics is so large in the field that it is usually considered to have provoked a radical change in paradigm. Apart from providing a convincing framework for a set of empirical facts, the main initial motivation of this new modelling paradigm was that there are new gains to be expected from trade liberalization. Those new gains come from a selection process, raising aggregate productivity of the opening economy through the reallocation of output among heterogeneous firms. It initially seemed that the information requirements for trade policy evaluations had become much more demanding, in particular requiring detailed micro data.
However, the recent work of Arkolakis et al. (2011) suggests that a small number of aggregate « sufficient statistics » may be all that is needed to compute the welfare changes associated with trade liberalization experiments. More, they show that those aggregate statistics are the same as the ones needed to evaluate welfare changes in models with representative firms. Hence, heterogeneity would not matter for what is probably one of the most important questions in trade: How does trade liberalization change welfare?
The project has three parts.
1 – The first one will start by showing that the sufficient statistics approach relies crucially on a very specific distributional assumption on firms’ heterogeneity, the Pareto distribution. When distributed non-Pareto, heterogeneity does matter, i.e. aggregate statistics are not sufficient to evaluate welfare changes and predict changes in trade patterns.
2 – The second part of the project focuses on specifying which type of firm-level heterogeneity matters. The literature has almost entirely concentrated on differences in productive efficiency, although in many cases, product quality might be more relevant in the competition on international markets. Of particular importance HETMAT shows how to identify which sectors are characterized by the classical « productivity sorting » and in which ones « quality sorting » seems more relevant.
3 – Extending the model so that firms are able to produce and export multiple products, the third part of the project will show that heterogeneity inside the firm also matters for welfare changes following trade shocks. It will consider how the change in the relative sales of different products sold by the firm, following trade liberalization alters the measured productivity of the firm. This mechanism might provide a new source of gains from trade, that arises within each firm in addition to the gains from inter-firm selection which are the usual focus of the literature.
Keith Head (UBC), Marc Meltiz (Harvard), Gianmarco Ottaviano (LSE), Philippe Martin (Sciences PO), Mathias Thoenig (U. of Lausanne) and Iabelle Méjean (Polytechnique) will be part of the scientific team.
Thierry Mayer’s main fields of research are international trade, economic geography and locations choices by multinational firms. Before joining the department at Sciences Po in 2009 he was professor of economics at the University of Paris 1 Panthéon-Sorbonne and at PSE. Thierry’s research was often rewarded, including the Bronze Medal of the CNRS in 2006. He was laureate for best French young economist in 2006 as well. Thierry Mayer is Junior member of the Institut Universitaire de France, scientific advisor in CEPII, and Research Fellow at CEPR (International Trade and Regional Economics Programme).