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When Pareto meets Melitz: the inapplicability of the Melitz-Pareto model for Chinese firms

Sun, Churen and Tian, Guoqiang and Zhang, Tao (2011): When Pareto meets Melitz: the inapplicability of the Melitz-Pareto model for Chinese firms.

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Abstract

This paper realizes the Melitz-Pareto model using firm-level data from 40 Chinese manufacturing industries from 1998 and 2007. Under the hypothesis that the productivity of firms in each industry follows a Pareto distribution, we show that the domestic sales of non-exporters and the foreign sales of exporters in each industry also follow a Pareto distribution, respectively. We then estimate industrial productivity Pareto distributions, and cut-offs of domestic sales of non-exporters and foreign sales of exporters for each industry. Together this yields all the parameters of the Melitz-Pareto model. Our result shows that the Melitz-Pareto model may not fully apply to Chinese firms.

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