Staff Report 444

Innovation, Firm Dynamics, and International Trade

Andrew Atkeson | Federal Reserve Bank of Minneapolis Consultant and UCLA
Ariel Burstein | UCLA

Published April 23, 2010

We present a general equilibrium model of the response of firms' decisions to operate, innovate, and engage in international trade to a change in the marginal cost of international trade. We find that, although a change in trade costs can have a substantial impact on heterogeneous firms' exit, export, and process innovation decisions, the impact of changes in these decisions on welfare is largely offset by the response of product innovation. Our results suggest that microeconomic evidence on firms' responses to changes in international trade costs may not be informative about the implications of changes in these trade costs for aggregate welfare.

Published In: Journal of Political Economy (Vol. 118, No. 3, June 2010, pp. 433-484)

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