4056 Ann Harrison and Andrés Rodríguez-Clare

Rents arise when sm is small relative to vm. For example, imagine an equilibrium
where sm ¼ 0 for all m 6¼ 1, and only country 1 has HP in industry 1. Then wj ¼ 1
for j ¼ 2, . . ., N while w1 > 1 if and only if v1 > s1: there are rents in industry
1 (i.e., the price of industry 1 is higher than the marginal cost at unitary wages, p1 >
1/x1).21
Industries differ with respect to three variables: complexity (measured by xm), size
(measured by vm), and the share of people in the world that live in countries that have
HP (measured by sm). We will refer to the later as “prevalence,” since it measures the
extent to which HP is widespread across the world in an industry. The previous result
suggests that industries will have rents if they are large relative to their prevalence.
Apart from this result, one can learn more from this model only by considering special
cases. Instead of doing this, we introduce some additional assumptions to “smooth out”
the kinks in the Ricardian model and obtain more general results.
Assume that each industry is composed of a continuum of goods with varying pro-
ductivity levels. Preferences remain Cobb-Douglas, but now with equal shares across
all goods. Thus, assuming that industry m has a measure vm of goods, then (as above)
expenditures on industry m are vm with S vm ¼ 1. (Note that it is natural to think of
vm as the “size” of industry m because it measures both the share of total expenditures
devoted to this industry and the measure of goods belonging to that industry.) More
importantly, we assume that productivity differs across goods within an industry as in
Eaton and Kortum (2002). Specifically, productivity for any particular good in sector
m in country j is ^xjm z, where ^xjm is as above and z is an additional productivity that
is independently drawn from the Fréchet distribution with parameters Tj and f, that
is, Prj (z " Z) ¼ exp [#Tjz#f].22 This distribution has sound microeconomic founda-
tions (see Eaton & Kortum, 2001), but understanding those foundations or its several
convenient properties is not important for our purposes here; it is sufficient to know
that a higher Tj implies better productivity draws for country j (on average).
Since each good is infinitesimally small and there are no transportation costs, then
each good will be supplied to the whole world by the country with the lowest cost.
If we consider a particular good in industry m with productivity draws (z1m, z2m, . . .,
zNm) in countries (1, 2, . . ., N ) then this good will be supplied by country
j ¼ arg minl fw l =^xlm zlm g. Eaton and Kortum (2002) show that a country with wage
wj and productivity parameter ^xjm will capture a share

ðwj =^xjm Þ#y T j

Djm ¼ X ð9Þ
l
ðw l =^xlm Þ#y T l

of total sales in industry m. A country with a lower Tj, a higher wj, or a lower ^xjm will
capture a smaller market share in industry m. Contrary to the standard Ricardian