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IZA Discussion Paper No. 3803
October 2008
Welfare in Models of Trade with Heterogeneous Firms

I illustrate that the welfare improvement property of the Melitz model is due to the shape of the aggregate labor demand curve, which slopes upwards. By slightly changing some assumptions in the model, this curve may have a negative slope. In this case, increases in aggregate productivity result in a reduction in welfare. For example, this may occur when fixed costs are measured in units of aggregate output instead of labor.

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Mark Fallak
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+352 585-855-526
World of Labour
Olga Nottmeyer
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+352 585-855-501
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Christina Gathmann
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