International Trade Patterns, the Skill Premium, and Heterogeneous Firms

We study the response of factor allocation and the skill premium to trade liberalizations in a model that combines exogenous determinants of comparative advantage--that result from sectoral productivity and factor endowment differences across countries--with endogenous determinants of comparative advantage--that result from the entry and production decisions of heterogeneous firms. We show how (i) productivity heterogeneity across firms, (ii) endogenous selection of firms into production and export markets, and (iii) endogenous firm entry---the determinants of endogenous comparative advantage---affect the response of factor allocation and the skill premium to trade liberalizations. The impact of these three margins on the skill premium, however, is fully reflected in sectoral trade patterns, which determine the factor content of trade.