Society of Economic Dynamics (SED) - Cyprus

The paper Thurk is presenting is joint with Kellogg faculty fellow, Antoine Gervais, entitled, “Trade Costs, Innovation, and the Gains from Trade.” We ask how differences in innovative ability affect the distribution of country-specific welfare gains under a trade liberalization. They find that firms with large domestic markets, or greater access to foreign markets, innovate more. This is consistent with the empirical finding that firms in developed countries tend to produce high unit-value products. Thurk and Gervais then show a reduction in trade costs incentivizes innovation by increasing the size of export markets, but also shifts welfare gains from developing to developed countries. Finally, they find that when trade costs contain both a per-unit and an ad valorem component, a reduction in the ad valorem tariff (the most common form of trade liberalization) actually increases this redistribution.