From Heterogeneous Firms to Heterogeneous Trade Elasticities: The Aggregate Implications of Firm Export Decisions

We study the consequences of globalization in monopolistic competition models where heterogeneous firms select into export markets. We summarize firm heterogeneity at the extensive and intensive margins of firm exports with two nonparametric elasticity functions that depend only on the share of active firms in a market. Given changes in trade costs, these elasticity functions are sufficient to compute the model’s counterfactual predictions, and their shape generates heterogeneity in welfare responses across countries. To estimate these functions, we use the model’s semiparametric gravity equations of firm export margins, which yield trade elasticity estimates that vary with the number of exporters in a market and the country’s level of development. Compared to constant-elasticity gravity models, our estimates imply gains from trade that are larger in developed countries but smaller in developing countries, with differences arising mainly due to the entry and selection of heterogeneous firms.