Trade and Firm Heterogeneity in a Quality-ladder Model of Growth,” unpublished

The present paper explores the effect of trade liberalization on the level of productivity as well as the rate of productivity growth in an R&D-based model with heterogeneous firms. We introduce new and plausible features that are absent in existing studies. First, technical progress takes the form of continual quality improvement of products over time. Second, firm entry and exit are endogenously determined due to creative destruc-tion of products. In this framework, we demonstrate that a lower trans-port cost or export sunk cost unambiguously reallocates resources from non-exporting industries to R&D as well as exporting industries. This means that trade liberalization increases the rate of technical progress as well as the level of manufacturing productivity. These results are found to be robust in an extended model with population growth without scal