Barroso: Does trade shrink the measure of domestic firms?


Does international trade shrink the steady state measure of domestic firms? The most recent models with heterogeneous firms suggest it does (Melitz (2003), Chaney (2007) and Arkolakis (2008)). The main force at work in such models is the selection of the fittest, with the least efficient firms exiting the market. Within the same class of models with heterogeneous firm productivity and strong selection effects, both in the consumption goods and the intermediate goods sectors, this paper shows that the measure of domestic firms may actually expand. The result is robust to the particular production function used to bundle labor and intermediate goods.


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