Hitotsubashi Institute for Advanced Study


A Solution to the Melitz-Trefler Puzzle


The empirical finding by Trefler (2004, AER) and others that industrial productivity increases more strongly in liberalized industries than in non-liberalized industries has been widely accepted as evidence for the Melitz (2003, Econometrica) model. But it is actually evidence against the Melitz model. Segerstrom and Sugita (2015, JEEA) showed that under very general assumptions, the multi-industry Melitz model predicts that productivity increases more strongly in non-liberalized industries than in liberalized industries. This disconnect between theory and evidence we call the Melitz- Trefler Puzzle. This paper presents a solution to the Melitz-Trefler puzzle, a new model consistent with the Trefler finding.

Report No.: HIAS-E-63
Author(s): Paul S. Segerstrom(a)
Yoichi Sugita(b)
Affiliation: (a) Stockholm School of Economics, Department of Economics, Box 6501, 11383 Stockholm, Sweden
(b) Hitotsubashi University, Graduate School of Economics, 2-1, Naka, Kunitachi, Tokyo 186-8603, Japan
issued Date: January 2018
Keywords: trade liberalization, firm heterogeneity, industrial productivity
JEL: F12, F13