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2008 Documento de Trabajo #253

Welfare in models of trade with heterogeneous firms

I illustrate that the welfare improvement property of the Melitz model is due to the shape of the aggregate labor demand curve, which slopes upwards. By slightly changing some assumptions in the model, this curve may have a negative slope. In this case, increases in aggregate productivity result in a reduction in welfare. For example, this may occur when fixed costs are measured in units of aggregate output instead of labor.

JEL codes: F12, F16, J23.

Alexandre Janiak

Keywords: aggregate labor demand curve, heterogenous firms, International Trade, welfare.