Publications

Working Paper
Head, Keith, Thierry Mayer, and Marc J. Melitz. Working Paper. “The Laffer Curve for Rules of Origin”. Abstract
We analyze how heterogeneous firms in a regional trade area (RTA) respond to
rules of origin (RoO). Firms can source a continuum of inputs from both within and
outside the RTA, and choose whether to comply with the RoO or pay a tariff penalty.
We show how a Laffer curve for RoOs arises naturally in this setting: stricter content
requirements initially expand regional part sourcing, but contract it when set at levels
above a threshold. The parameters of the model are fit to data on regional part cost
shares for all autos sold in North America. The calibrated model quantifies the impact
of stricter RoOs imposed by the 2020 revision to NAFTA (USMCA). The stricter
content requirement (62.5% to 75%) would raise employment by only 1.2%, while increasing
auto prices assembled in the region by 0.3%. The higher requirement initially
proposed by U.S. negotiators (85%) would lead to both higher prices and lower employment.
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Bilbiie, Florin O., and Marc J. Melitz. Working Paper. “Aggregate-Demand Amplification of Supply Disruptions:The Entry-Exit Multiplier”. Abstract
Due to its impact on nominal firm profits, price rigidity amplifies the response of entry and
exit to adverse supply shocks, such as COVID-19. This “entry-exit multiplier” triggers substantial
magnification of the welfare losses due to negative supply shocks—especially when
wages are also rigid. This is in stark contrast to the benchmark New Keynesian model (NK),
which predicts a positive output gap in response to that same shock under the same monetary
policy. Endogenous entry-exit thus radically changes the consequences of nominal rigidities.
In addition to the aggregate-demand amplification of supply disruptions, our model also reconciles
the response of hours worked across the NK and RBC models. And unlike the standard
NK model, our model can also be used to evaluate how monetary expansions can alleviate or
even eliminate the negative output gap induced by supply disruptions.
JEL Codes: E3, E4, E5, E6
Keywords: Entry-Exit; Aggregate Demand and Supply; Variety; Sticky Prices; StickyWages;
COVID-19; Recessions.
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Forthcoming
Aghion, Phillipe, Antonin Bergeaud, Matthieu Lequien, Marc J. Melitz, and Thomas Zuber. Forthcoming. “Opposing firm-level responses to the China shock: Output competition versus input supply.” American Economic Journal: Economic Policy. Abstract
We decompose the “China shock” into two components that induce different
adjustments for firms exposed to Chinese exports: an output shock affecting firms
selling goods that compete with similar imported Chinese goods, and an input
supply shock affecting firms using inputs similar to the imported Chinese goods.
Combining French accounting, customs, and patent information at the firm-level,
we show that the output shock is detrimental to firms’ sales, employment and
innovation. Moreover, this negative impact is concentrated on low-productivity
firms. By contrast, we find a positive effect - although often not significant - of the
input supply shock on firms’ sales, employment and innovation.
JEL classification: F14, O19, O31, O33, O34
Keywords: Competition shock, patent, firms, import
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2023
Bighelli, Tommaso, Filippo di Mauro, Marc J. Melitz, and Matthias Mertens. 2023. “European Firm Concentration and Aggregate Productivity.” Journal of the European Economic Association 21 (2): 455-483.
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Melitz, Marc J., and Stephen J. Redding. 2023. “Trade and Innovation.” The Economics of Creative Destruction. Harvard University Press. Abstract
Two central insights from the Schumpeterian approach to innovation and growth are that
the pace of innovation is endogenously determined by the expectation of future prots and
that growth is inherently a process of creative destruction. As international trade is a key
determinant of rm protability and survival, it is natural to expect it to play a key role in
shaping both incentives to innovate and the rate of creative destruction. In this paper, we review
the theoretical and empirical literature on trade and innovation. We highlight four key
mechanisms through which international trade aects endogenous innovation and growth:
(i) market size; (ii) competition; (iii) comparative advantage; (iv) knowledge spillovers. Each
of these mechanisms oers a potential source of dynamic welfare gains in addition to the
static welfare gains from trade from conventional trade theory. Recent research has suggested
that these dynamic welfare gains from trade can be substantial relative to their static
counterparts. Discriminating between alternative mechanisms for these dynamic welfare
gains and strengthening the evidence on their quantitative magnitude remain exciting areas
of ongoing research.
Keywords: innovation, growth, international trade
JEL Classication: F1, F43, O3, O4
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2022
Akcigit, Ufuk, and Marc J. Melitz. 2022. “International Trade and Innovation.” Handbook of International Economics, 5: 377-404. Elsevier. Abstract
We provide a review of the recent literature – both theoretical and empirical – analyzing
the multi-dimensional connections between globalization and innovation. We
develop a model that features many of those mechanisms that connect trade and innovation.
It features the joint selection of firms into innovation and international market
participation (in our model, we restrict that participation to exports). Our model also
highlights how exposure to international markets affects the incentives for innovation.
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Aghion, Philippe, Antonin Bergeaud, Matthieu Lequien, and Marc J. Melitz. 2022. “The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports.” The Review of Economics and Statistics. Abstract

This paper investigates the effect of export shocks on innovation. On the one hand a positive shock increases market size and therefore innovation incentives for all firms. On the other hand it increases competition as more firms enter the export market. This in turn reduces profits and therefore innovation incentives particularly for firms with low productivity. Overall the positive impact of the export shock on innovation is magnified for high productivity firms, whereas it may negatively affect innovation in low productivity firms. We test this prediction with patent, customs and production data covering all French manufacturing firms. To address potential endogeneity issues, we construct firm-level export proxies which respond to aggregate conditions in a firm's export destinations but are exogenous to firm-level decisions. We show that patenting robustly increases more with export demand for initially more productive firms. This effect is reversed for the least productive firms as the negative competition effect dominates.

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2021
Mayer, Thierry, Marc J. Melitz, and Gianmarco I.P. Ottaviano. 2021. “Product Mix and Firm Productivity Responses to Trade Competition.” The Review of Economics and Statistics 103 (5): 874-891. Abstract

We document how demand shocks in export markets lead French multi-product exporters to re-allocate the mix of products sold in those destinations. In response to positive demand shocks, those French firms skew their export sales towards their best performing products; and also extend the range of products sold to that market. We develop a theoretical model of multi-product firms and derive the specific demand conditions needed to generate these product-mix reallocations. These demand conditions are associated with endogenous price elasticities that satisfy Marshall’s Second Law of Demand (the price elasticity of demand decreases with consumption). Under these demand conditions, our theoretical model highlights how the increased competition from demand shocks in export markets – and the induced product mix reallocations – induce productivity changes within the firm. We then empirically test for this connection between the demand shocks and the productivity of multi-product firms exporting to those destinations. We find that the effect of those demand shocks on productivity are substantial – and explain an important share of aggregate productivity fluctuations for French manufacturing

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2019
Bilbiie, Florin O., Fabio Ghironi, and Marc J. Melitz. 2019. “Monopoly Power and Endogenous Product Variety: Distortions and Remedies.” American Economic Journal: Macroeconomics 11 (4): 140-74.
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2018
Melitz, Marc J. 2018. “Trade Competition and Reallocations in a Small Open Economy.” World Trade Evolution: Growth, Productivity and Employment, edited by Lili Yan Ing and Miaojie Yu. Routledge.
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2017
Melitz, Marc J. 2017. “Competitive effects of trade: theory and measurement.” Review of World Economics. Publisher's Version
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Bergstresser, Dan, and Marc Melitz. 2017. “The Jones Act and the Cost of Shipping Between U.S. Ports.” EconoFact. Publisher's Version
Klein, Michael, and Marc Melitz. 2017. “What Do We Learn from Bilateral Trade Deficits?” The Econofact Network. Publisher's Version
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Melitz, Marc. 2017. “Driving Home the Importance of NAFTA.” The Econofact Network. Publisher's Version
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2015
Melitz, Marc, and Saso Polanec. 2015. “Dynamic Olley-Pakes Productivity Decomposition with Entry and Exit.” RAND Journal of Economics 46 (2): 362-375. Publisher's Version Abstract

In this paper, we propose an extension of the productivity decomposition method developed by Olley & Pakes (1996). This extension provides an accounting for the contributions of both firm entry and exit to aggregate productivity changes. It breaks down the contribution of surviving firms into a component accounting for changes in the firm-level distribution of productivity and another accounting for market share reallocations among those firms following the same methodology as the one proposed by Olley & Pakes (1996). We argue that the other decompositions that break-down aggregate productivity changes into these same four components introduce some biases in the measurement of the contributions of entry and exit. We apply our proposed decomposition to the large measured increases of productivity in Slovenian manufacturing during the 1995-2000 period and contrast our results with those of other decompositions. We find that, over a 5-year period, the measurement bias associated with entry and exit is substantial, accounting for up to 10 percentage points of aggregate productivity growth. We also find that market share reallocations among surviving firms played a much more important role in driving aggregate productivity changes.
Keywords: Productivity Decomposition, Industry Productivity
JEL Classication Numbers: C10, O47

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Melitz, Marc, and Stephen J Redding. 2015. “New Trade Models, New Welfare Implications.” American Economic Review 105 (3): 1105-46. American Economic Review Abstract

We show that endogenous firm selection provides a new welfare margin for heterogeneous firm models of trade (relative to homogeneous firm models). Under some parameter restrictions, the trade elasticity is constant and is a sufficient statistic for welfare, along with the domestic trade share. However, even small deviations from these restrictions imply that trade elasticities are variable and differ across markets and levels of trade costs. In this more general setting, the domestic trade share and endogenous trade elasticity are no longer sufficient statistics for welfare. Additional empirically observable moments of the micro structure also matter for welfare.
KEYWORDS: firm heterogeneity, welfare gains from trade, trade policy evaluation
J.E.L. CLASSIFICATION: F12, F15

PDF Appendix
2014
Melitz, Marc J, and Stephen J Redding. 2014. “Missing Gains from Trade?” American Economic Review 104 (5): 317-21. Publisher's Version Abstract

The theoretical result that there are welfare gains from trade is a central tenet of international economics. In a class of trade models that satisfy a “gravity equation,”the welfare gains from trade can be computed using only the open economy domestic trade share and the elasticity of trade with respect to variable trade costs. The measured welfare gains from trade from this quantitative approach are typically relatively modest. In this paper, we suggest a channel for welfare gains that this quantitative approach typically abstracts from: trade-induced changes in domestic productivity. Using a model of sequential production, in which trade induces a reorganization of production that raises domestic productivity, we show that the welfare gains from trade can become arbitrarily large. JEL CLASSIFICATION: F10, F11, F15 KEYWORDS: Productivity, Sequential production, Welfare gains from trade

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Melitz, Marc, Thierry Mayer, and Gianmarco IP Ottaviano. 2014. “Market Size, Competition, and the Product Mix of Exporters.” American Economic Review 104 (2): 495-536. Abstract

We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.

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Melitz, Marc J, and Stephen J Redding. 2014. “Heterogeneous Firms and Trade.” Handbook of International Economics, 4th ed, 4: 1-54. Elsevier. Publisher's Version Abstract

This paper reviews the new approach to international trade based on firm heterogeneity in differentiated 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 affected by trade liberalization, including endogenous increases in average industry and firm productivity.

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2013
Burstein, Ariel, and Marc Melitz. 2013. “Trade Liberalization and Firm Dynamics.” Advances in Economics and Econometrics Tenth World Congress. Applied Economics, Econometric Society Monographs. Vol. 2. Cambridge, UK: Cambridge University Press. Abstract
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.
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