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Productivity Matters for Trade Policy: Theory and Evidence

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  • Baybars Karacaovali

    (Fordham University, Department of Economics)

Abstract

There is a growing literature where authors investigate the effect of trade liberalization on productivity. Nearly all such studies assume that trade policy is determined independently of productivity, hence it is exogenous. I show, both theoretically and empirically, that this assumption is not valid in general and that researchers may be underestimating the positive effect of liberalization on productivity when they do not account for the endogeneity bias. More productive sectors receive more protection and the sectors with a higher productivity gain are liberalized less even in the presence of a large unilateral liberalization shock that affects all sectors.

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Bibliographic Info

Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-14.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-14

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Keywords: Productivity; trade liberalization; endogeneity; political economy of trade policy; learning-by-doing;

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Cited by:
  1. Altomonte, Carlo & Barattieri, Alessandro & Rungi, Armando, 2008. "Import Penetration, Intermediate Inputs and Productivity: Evidence from Italian Firms," Papers DYNREG23, Economic and Social Research Institute (ESRI).
  2. Cruz, Moritz, 2008. "Can Free Trade Guarantee Gains from Trade?," Working Papers RP2008/97, World Institute for Development Economic Research (UNU-WIDER).
  3. Paz, Lourenco, 2012. "Trade liberalization and inter-industry productivity spillovers: an analysis of the 1989-1998 Brazilian trade liberalization episode," MPRA Paper 38859, University Library of Munich, Germany.
  4. Levent Celik & Bilgehan Karabay & John McLaren, 2011. "Trade Policy Making in a Model of Legislative Bargaining," NBER Working Papers 17262, National Bureau of Economic Research, Inc.
  5. Torfinn Harding and Jørn Rattsø, 2009. "Industrial labor productivities and tariffs in South Africa: Identification based on multilateral liberalization reform," Working Paper Series 10309, Department of Economics, Norwegian University of Science and Technology.
  6. Paz, Lourenco, 2012. "Trade liberalization and the inter-industry wage premia: the missing role of productivity," MPRA Paper 39024, University Library of Munich, Germany.
  7. Paz, Lourenco, 2012. "The impacts of trade liberalization on informal labor markets: an evaluation of the Brazilian case," MPRA Paper 38858, University Library of Munich, Germany.

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