Year of Graduation
Non-CES Trade Models, New Welfare Implications
Applied Economics and Mathematical Methods
I combine (Melitz, 2003) model with monopolistic competition and hetergeneous firms with non-CES preferences. I find that introduction of preferences with variable elasticity of substitution between varieties allows more productive firms to have higher monopoly power. This, in turn, reduces the dispersion of outputs of firms that differ in their productivities, induces market distortion and leads to inefficient allocation of production. In addition, the selection effect becomes more severe.