Inter-industry trade and heterogeneous firms: country size matters

This study investigates how industries with different patterns of firm heterogeneity distribute across countries by developing a three-sector general-equilibrium model. We show that the larger country is more specialized in the industry with heterogeneous (homogeneous) firms when trade costs are low (high) and that an increase in the inter-industry difference in firm heterogeneity fosters the larger country's degree of specialization in the industry with heterogeneous firms. We also disclose the wage inequality and trade patterns across countries and show how they respond to trade liberalization.