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Unobserved heterogeneity in the productivity distribution and gains from trade
Author(s) -
Dewitte Ruben,
Dumont Michel,
Rayp Glenn,
Willemé Peter
Publication year - 2022
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12613
Subject(s) - productivity , econometrics , parametric statistics , economics , distribution (mathematics) , mathematics , statistics , macroeconomics , mathematical analysis
Finding a good parametric approximation to the productivity distribution is a problem of general interest. This paper argues that heterogeneity in productivity is best captured by finite mixture models (FMMs). FMMs build on the existence of unobserved subpopulations in the data. As such, they are generally consistent with models of firm dynamics differing between groups of firms and allow for a very flexible distribution fit. Relative to commonly used parametric alternatives, we find that FMMs are the only distributions able to provide a sufficiently good fit to the data. A gains from trade exercise with Portuguese data reveals that only FMMs approximate the “true” gains reasonably well.