The Tip of the Iceberg: Modeling Trade Costs and Implications for Intra-industry Reallocation ∗ (2010)
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BibTeX
@MISC{Irarrazabal10thetip,
author = {Alfonso Irarrazabal and Luca David Opromolla and Acknowledgements We and Costas Arkolakis and Gregory Corcos and Samuel Kortum and Arvid Raknerud and Re Skiba and Karen Helene Ulltveit-moe},
title = {The Tip of the Iceberg: Modeling Trade Costs and Implications for Intra-industry Reallocation ∗},
year = {2010}
}
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Abstract
International economics has overwhelmingly relied on Samuelson’s (1954) assumption that trade costs are proportional to value. We build a general equilibrium heterogeneous firms model of trade that allows for both ad valorem and per-unit costs. Using a novel minimum distance estimator we are able to identify per unit trade costs from the distribution of foreign sales across markets. Estimated average per-unit costs are substantial being, on average, between 35 and 45 percent of the average consumer price. This leads us to reject the pure ad valorem cost assumption. An important theoretical finding is that non-ad valorem trade costs create an additional channel of gains from trade through within-industry reallocation. Thus, we show that standard welfare assessments of trade liberalization may be understated.
