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New publication in the research area INEPA [30.01.18]
Prof. Dr. Benjamin Jung recently published the paper "Market Size and TFP in the Melitz Model" in the Review of International Economics
In the paper, which is available at http://dx.doi.org/10.1111/roie.12346, Prof. Dr. Benjamin Jung and Prof. Gabriel Felbermayr, PhD, from ifo Institute analyze the relationship between relative market size and relative total factor productivity. They show that the so-called "new new" trade theory a la Melitz (2003) can be in line with the observation that the empirical relationship between size and TFP is rather weak. The intuition is that the larger country hosts an overproportional share of firms - which works in favor of a strong positive relationship as in the "new" trade theory a la Krugman (1980) -, but firms are on average less productive. Put differently, in an open economy, country size weakens the domestic selection effect. The second channel may even dominate, depending on the degree of "love for variety".
The paper adds to the literature on cross-country real income inequality and therefore contributes to the research ara Inequality and Economic Policy Analysis (INEPA) of the Instiutute of Economics at the University of Hohenheim.
The Review of International Economics is an international, peer-reviewed journal devoted to the publication of high-quality articles covering a full range of topics in international economics.