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A Theory of Trade Liberalization and Innovations with Heterogeneous Firms
Discussion paper / Internet publication
 
ID 4266097
Digital Object Identifier DOI 10.2139/ssrn.2410343
Author(s) Rutzer, Christian
Author(s) at UniBasel Rutzer, Christian
Year 2014
Month and day 03-19
Title A Theory of Trade Liberalization and Innovations with Heterogeneous Firms
Series title WWZ Discussion Papers
Volume 2014
Number 02
Pages 35
Publisher / Institution WWZ, University of Basel
Keywords Aggregate Level, Firm Size Distribution, Heterogeneous Firms, R&D Investments, Trade Liberalization
Abstract This paper extends the firm heterogeneity model of Melitz (2003) by introducing a new concept of endogenous investments in process R&D. The novelty is that if a firm invests more in R&D its expected innovation return hazard rate stochastically dominates the return of less R&D investments. Due to this property, entrants invest more in R&D in response to trade liberalization. As a result, the aggregate productivity is affected by a reallocation of resources to more productive firms and a simultaneous increase in firms' investments in innovations, which is consistent with empirical findings. At the same time the firms' increased R&D investments lead to a sector distribution with a higher right-tail compared to the distribution prior to trade liberalization. Hence, the model gives an explanation for the empirically found differences in the distribution tails among sectors with different trade openness levels. Another advantage of this paper's framework compared to other trade models with innovations is its foundation in and extension of Melitz (2003). It enables most of the heterogeneous firms trade models to be extended by endogenous firm-level R&D in an empirically relevant and analytically tractable way.
edoc-URL https://edoc.unibas.ch/61339/
Full Text on edoc Available
 
   

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