University of Tokyo
Faculty of Economics
Tokyo 113-0033, Japan
Institutional Affiliation: University of Tokyo
NBER Working Papers and Publications
|August 2016||Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale|
with Gary Lyn, Andrés Rodríguez-Clare: w22484
Although economists have long been interested in the implications of Marshallian externalities (i.e., industry-level external economies of scale) for trading economies, the large number of equilibria that they typically imply has kept such externalities out of the recent quantitative trade literature. This paper presents a multi-industry trade model with industry-level economies of scale that nests a Ricardian model with Marshallian externalities as well as multi-industry versions of Krugman (1980} and Melitz (2003). The behavior of the model depends on two industry-level elasticities: the trade elasticity and the scale elasticity. We show that there is a unique equilibrium if the product of the trade and scale elasticities is weakly lower than one in all industries. The welfare analysis r...