use the same dataset to investigate, respectively, the impact of firms' innovation strategies on the growth of TFP, the relationship between financial development and innovation, and the relationship between financial constraints and firm size distribution. Moreover, using older releases of our dataset, Castellani (2002) shows evidence that exporters are generally more productive than non-exporters and that productivity increases after exporting (learning-by-exporting).[ 1206 ] 4 As for trade and quality consumption see, in particular, Bils and Klenow (

This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a uni…ed framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the …rst mechanism is ine¢ cient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our …ndings raise warnings that globalization may have led to ine¢ ciently large governments.JEL Classi…cation: F1, H1

This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a uni…ed framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the …rst mechanism is ine¢ cient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our …ndings raise warnings that globalization may have led to ine¢ ciently large governments.JEL Classi…cation: F1, H1

No abstract

We investigate competitive, selection and reallocation e¤ects in monopolistic competition trade models. We argue that departing from CES preferences in an otherwise standard Dixit-Stiglitz setup with additive preferences seems to involve implausible assumptions about consumer behavior and inconsistent competitive e¤ects. In the presence of trade costs, selection e¤ects à la Melitz (2003) are instead generally robust to the assumptions about preferences. However, they are unambiguously associated to aggregate productivity gains only when preferences are CES. We also study competitive e¤ects in alternative monopolistic competition settings featuring non-additive preferences, strategic interaction and consumers'preference for an ideal variety. We …nd that none of the these setups delivers a compelling pro-competitive mechanism.Overall, our results suggest that in monopolistic competition, consistent with CES preferences, larger markets select more aggressively on productivity rather than forcing …rms to move down their average cost curves.