Essays in firms heterogeneity and international trade

Chapter 1: Productivity Improvements and Falling Trade Costs: Boon or Bane? This essay looks at two features of globalization, namely, productivity improvements and falling trade costs, and explores their effect on welfare in a monopolistic competition model with heterogeneous firms and technological asymmetries. Contrary to received wisdom, and for reasons unrelated to adverse terms of trade effects, it is shown that improvements in a partner's productivity reduce welfare. Moreover, with technological asymmetries, the more productive country gains significantly more from falling trade costs than does the backward one.;Chapter 2 (with Hiau Looi Kee and Kala Krishna): Do Trade Policy Differences Induce Sorting? Theory and Evidence from Bangladeshi Apparel Exporters. This essay provides new testable predictions of heterogeneous firm (HF) models for trade. Variations in trade policy, trade preferences, and the rules of origin (ROOs) needed to obtain them are incorporated into the model and some analytical means of dealing with the resulting asymmetries are developed. The policy differences modeled correspond to differences across products and destination markets for Bangladeshi garment exports to the US and EU which turns out to provide an interesting natural experiment. Predictions of the model for the distributions of TFP of various groups of firms are tested nonparametrically and are supported by the data.;Chapter 3 (with Andres Rodriguez-Clare): Export Subsidies, Productivity and Welfare under Firm-Level Heterogeneity. In this essay the monopolistic competition setting with heterogeneous firms is used to study the effect of an export subsidy on productivity and welfare of a small economy with a first best consumer subsidy already in place, which neutralizes the domestic distortion caused by the mark-up. It is shown that even though the export subsidy induces productivity growth in the economy, its effect on welfare is negative due to increasing input prices and falling variety.;Chapter 4 (with Kala Krishna): Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model: A Comment. This essay shows that the results of Venables (1987) strongly depend on the assumption that there are no fixed costs of trade. The introduction of fixed costs of exporting, while making the model more consistent with the empirical evidence, leads to the opposite conclusion that technological progress in one country cannot harm the welfare of its trading partner. However, the results can be obtained in a richer setting with heterogeneous firms.;Chapter 5 (with Kala Krishna): Regulations, Regime Switches and Non-Monotonicity when Non-Compliance is an Option: An Application to Content Protection and Preference: A Comment. This essay shows that the result of Ju and Krishna (2002), i.e., the non-monotonicity in the comparative statics across regimes, disappears, if exporters differ in their productivities. Taking into account firm heterogeneity not only makes the model more consistent with the empirical data, but also provides very different predictions about the results of policy changes.