Book Chapter

Melitz, Marc, and Ariel Burstein. Forthcoming. Trade Liberalization and Firm Dynamics. In Advances in Economics and Econometrics: Theory and Applications, Econometric Society Monographs.Abstract
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In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, sunk export costs, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes.  
Melitz, Marc J, and Stephen J Redding. Forthcoming. Heterogeneous Firms and Trade. In Handbook of International Economics, 4th ed. (Preliminary Draft).Abstract
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Appendix.pdf
This paper reviews the new approach to international trade based on fi rm heterogeneity in diff erentiated product markets. This approach explains a variety of features exhibited in disaggregated trade data, including the higher productivity of exporters relative to non-exporters, within-industry reallocations of resources following trade liberalization, and patterns of trade participation across firms and destination markets. Accounting for these empirical patterns reveals new mechanisms through which the aggregate economy is aff ected by trade liberalization, including endogenous increases in average industry and fi rm productivity.
Melitz, Marc. 2008. International Trade and Heterogeneous Firms. In New Palgrave Dictionary of Economics, 2nd Edition. Palgrave Macmillan.Abstract
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Empirical studies of production units within sectors have reported a massive amount of heterogeneity in various performance measures (most notably, size and productivity). This heterogeneity, within sectors, matters for theoretical and empirical models of trade. Trade, or trade liberalization more generally, induces important reallocations between heterogeneous producers in a sector: the smallest or least productive producers are forced to exit, and market shares are further reallocated between less productive producers (who do not export) towards larger, more productive exporters. These reallocations generate a new channel for productivity and welfare gains from trade.
Melitz, Marc, and J Costantini. 2007. The Dynamics of Firm-Level Adjustment to Trade Liberalization. In The Organization of Firms in a Global Economy, E Helpman, Marin, D, and Verdier, T. Cambridge: Harvard University Press.Abstract
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We build a dynamic model of …rm-level adjustment to trade liberalization that jointly in- corporates the main salient features highlighted by recent empirical micro-level studies of …rms and trade. Our model captures the joint entry, exit, export, and innovation decisions (subject to sunk costs) of heterogeneous …rms as they adjust to trade liberalization. We characterize this industrial evolution over its entire transition path to a new steady state with lower trade costs - starting from the time that trade liberalization is …rst announced (but not necessarily yet implemented). We rely on numerical methods to solve for these equilibrium paths. In order to more accurately capture the dynamics of …rm adjustments to trade, we model the sunk nature of market entry costs for both the domestic and export market - as well as the per-unit and additional …xed costs of exporting incurred in every period. Firm-level productivity evolves stochastically, and innovation involves a trade-o¤ between its cost and a return in terms of a “better”distribution of future productivity draws. Although the empirical micro-level studies of …rms and export status initially emphasized the selection e¤ects of more productive …rms into export markets, several recent studies have highlighted a separate channel for the e¤ects of trade on productivity operating through …rm- level improvements in productivity. Our model captures both of these channels for the pro- ductivity enhancing e¤ects of trade - and analyzes their interactions over the adjustment path to lower trade costs. In particular, we highlight how the relative timing and magnitude of …rm-level productivity improvements and export market entry decisions are also determined by non-technological factors such as the timing of trade liberalization announcements and the speed of liberalization. Under all these di¤erent trade liberalization scenarios (anticipated ver- sus surprise, gradual versus sudden), we characterize both the distributional e¤ects across …rms as well as their aggregate e¤ects for industrial performance. We …nd that the anticipation of upcoming liberalization, and a more gradual path of liberalization (once implemented) induces …rms to innovate ahead of export market entry.