Speaker: Sergey Kichko, National Research University Higher School of Economics, St. Petersburg

Title: Welfare in multisectoral models with endogenous product variety (with Kristian Behrens and Philip Ushchev)

Abstract: We study the welfare implications of intrasectoral shocks whose direct effect is welfare-improving in two-sectoral general equilibrium models with entry. We develop a dual necessary and sufficient condition of welfare losses, which occur when the negative intersectoral effect dominates the positive intrasectoral effect. Our approach is flexible enough to capture (i) bilateral losses from trade in models of intraindustry trade under constant or variable markups, (ii) welfare losses from sectoral productivity improvements in multisectoral models with Melitz-type heterogeneity across firms. We show that, when goods produced by the two sectors are gross complements, welfare gains will always take place. For the case of gross substitutes, we develop a systematic procedure of constructing examples of losses. In particular, we show that, for losses from trade to occur, neither any asymmetries across countries, nor variable markups in either sector are essential. The only source of possible distortions is the interplay between (i) consumers' love for variety and (ii) the adjustment of sectoral budget shares to the new level of trade freeness.

Organizer: Allan Sørensen