Entry assumptions and welfare gains from trade

- When entry is exogenous, aggregate profits accrue to consumers as dividends.
- The extra adjustment in dividends dampens the relative increase in real wage.
- Hence, welfare gains from trade are lower under exogenous relative to free entry.
- This wedge grows with the extent of trade liberalization.

When productivities are not Pareto distributed, welfare gains from trade are not necessarily isomorphic between entry assumptions. Under exogenous entry, the extra adjustment in dividends dampens the relative increase in real wage as trade costs decline, resulting in lower welfare gains than under free entry.