| Abstract |
This paper extends the heterogeneous firms model by Melitz (2003), as it combines a two factor/two country neoclassical Ramsey growth model with Melitz' intra-industry trade model. Heterogeneity across firms refers here to the capital intensity in production at given relative factor prices. This paper demonstrates that central results of Melitz (2003) are not robust against endogenizing the countries' capital endowments. Depending on the magnitude of variable and fixed export costs, opening a country up to international trade may change the average firm's capital intensity in either direction. The subsequent increase (decrease) in the country's total capital endowment increases (decreases) total welfare. Consequently, exposure to trade may reduce welfare due to heterogeneity across firms. In contrast to Melitz (2003), this model is therefore able to provide a rationale for an import tariff. |