Asymmetric Technological Change in the Melitz Model: Are Foreign Technological Improvements Harmful?

Foreign technological advance unambiguously reduces home welfare in a popular variant of the Melitz (2003) model that assumes the presence of a costlessly traded homogeneous good (Demidova, 2008). The present paper shows that this result is sensitive to the presence of such a good and is reversed in its absence. Indeed, in a generalized version of the Melitz model that adds a nontraded good and nests the original version as a special case, we show that foreign technological advance always improves home welfare. We derive relations that require information on only a few parameters to calibrate the model to data. These relations are used to calibrate an international trade model for the United States for quantitative analysis of the welfare effects. US is found to gain much less from foreign technological improvements than its trading partners from US improvements.