Markups vary widely across industries and countries, their heterogeneity has increased overtime and asymmetric exposure to international trade seems partly responsible for this phenomenon. In this paper, we study how the entire distribution of markups affects resource misallocation and welfare in a general equilibrium framework encompassing a large class of models with imperfect competition. We then identify conditions under which trade opening, by changing the distribution of markups, may reduce welfare. Our approach is novel both in its generality and in the emphasis on the second moment of the markup distribution. Two broad policy recommendations stand out from the analysis. First, whenever there is heterogeneity in markups, be it due to trade or other distortions, there is also an intersectoral misallocation, so that the equilibrium can be improved upon with an appropriate intervention. This suggests that trade liberalization and domestic industrial policy are complementary. Second, ensuring free-entry is a crucial pre-condition to prevent adverse effects from asymmetric trade opening.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Paolo Epifani & Gino Gancia, 2008.
"The Skill Bias of World Trade,"
Economic Journal,
Royal Economic Society, vol. 118(530), pages 927-960, 07.
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Paolo Epifani & Gino Gancia, 2002.
"The Skill Bias of World Trade,"
CESPRI Working Papers
129, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised Mar 2001.
[Downloadable!]
Epifani, Paolo & Gancia, Gino, 2002.
"The Skill Bias of World Trade,"
Seminar Papers
707, Stockholm University, Institute for International Economic Studies.
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