Trade, firm selection and innovation: the competition channel

Impullitti, Giammario and Licandro, Omar (2018) Trade, firm selection and innovation: the competition channel. Economic Journal, 128 (608). pp. 189-229. ISSN 1468-0297

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We study the welfare gains from trade in an economy with heterogeneous firms, variable markups and endogenous growth. Variable markups arise from oligopolistic competition, and cost-reducing innovation is the engine of long-run growth. Trade liberalisation stiffens competition by reducing markups, generating tougher firm selection and increasing the aggregate productivity level. Selection increases firms’ incentives to innovate, thereby leading to a higher aggregate productivity growth rate. Endogenous productivity growth boosts the selection gains from trade, leading to substantial welfare improvements. A calibrated version of the model shows that growth doubles the welfare gains obtainable in models with static firm-level productivity.

Item Type: Article
Additional Information: This is the peer reviewed version of the following article: Trade, Firm Selection and Innovation: The Competition Channel / Giammario Impullitti1, and Omar Licandro Version of Record online: 7 AUG 2017, which has been published in final form at This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Keywords: Endogenous Growth, Heterogeneous Firms, Oligopoly, Variable Markups, Dynamic Gains from Trade
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number:
Depositing User: Eprints, Support
Date Deposited: 04 Oct 2017 13:52
Last Modified: 04 May 2020 19:52

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