International trade and firm heterogeneity

Accounting for firms’ heterogeneity in trade patterns is probably the most important innovation of the field of international trade that occurred during the last decade. The impact of initial papers such as Melitz (2003) for theory and Bernard and Jensen (1999) for the empirics is so large in the field that it is usually considered to have provoked a radical change in paradigm. Apart from providing a convincing framework for a set of empirical facts, the main initial motivation of this new modelling paradigm was that there are new gains to be expected from trade liberalization. Those new gains come from a selection process, raising aggregate productivity of the opening economy through the reallocation of output among heterogeneous firms. It initially seemed that the information requirements for trade policy evaluations had become much more demanding, in particular requiring detailed micro data.

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The Hetmat project (Heterogeneity That Matters for Trade and Welfare) came to a close in July 2018.

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