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Exploiting complementarity in applied general-equilibrium models
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DOI：10.1016/j.econmod.2026.107816.png)
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Abstract
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Both analytical general-equilibrium models and applied applications generally make compromises to avoid endogenous zeros and discrete regime shifts. In open economy models, assumptions such as national-level product differentiation, a continuum of firms, probabilistic production, and smooth parametric distribution functions ensure interior, closed-form solutions to systems of equations. But resulting complexities restrict models to sparse general-equilibrium structures. I offer an alternative by exploiting non-linear complementarity. While this approach is applicable to many problems where boundary solutions are important, I focus on heterogeneous firms, endogenous exporting and multinational production. There is a discrete set of firm types allowing for any differences in productivity which can be calibrated from observed market shares. The model incorporates large firms with endogenous markups and solves for the set of active firms and their supply modes (no entry, domestic, exporting, multinational). Although focusing on international trade, I argue that the complementarity formulation is valuable for a wide range of economic equilibrium problems, allowing empirically-relevant policy analysis.
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