Carsten Eckel, University of Munich, and Stephen Yeaple, Pennsylvania State University and NBER
Is Bigger Better? Multi-product Firms, Labor Market Imperfections, and International Trade
International trade is primarily conducted by large, multi-product firms (MPFs) that pay above average wages and exhibit high productivity. In this paper, Eckel and Yeaple introduce labor market frictions and worker heterogeneity into the standard Krugman framework and show that the augmented model simultaneously generates both small, non-exporting single-product firms (SPFs) and large, exporting MPFs. Further, the MPFs that emerge pay higher wages and exhibit higher measured labor productivity than SPFs. Despite their exceptional performance, MPFs are inefficient because they use their ability to extract rents from their workers to expand into high unit input activities. Trade liberalization always raises the real income of high wage workers and lowers real income for low wage workers but has an ambiguous effect on aggregate welfare. Although trade liberalization forces MPFs to become more efficient, it also reallocates resources from small, efficient firms to the large, inefficient firms. The model highlights the need to know why firms "excel" before drawing welfare conclusions regarding cross firm reallocations of resources.