Technology, ecology and agricultural trade

Abstract

I present a methodology for parameterizing and solving a probabilistic Ricardian model with two tradable sectors based on Eaton and Kortum (2002), henceforth EK. I make two changes that generate correlation in product-specific agricultural comparative advantage across agro-ecologically similar countries and deliver trade elasticities that are increasing in this correlation. First, I add product heterogeneity stemming from agro-ecological characteristics to the independently distributed productivity differences in production technology advanced by EK. Second, I allow trade costs to vary across products. As in EK, I estimate trade costs using bilateral trade flow data. However, to account for the additional heterogeneity, I use the simulated method of moments estimator pioneered by Berry, Levinsohn and Pakes (1995). The modified model successfully generates large differences in an exporter's elasticity with respect to its close competitors versus those that produce a very different set of agricultural products. This produces substantial differences in the model's predictions for changes to production and trade patterns in response to agricultural liberalization compared to those predicted by EK.