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Competition, Markups, and the Gains from International Trade

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Author Info

  • Edmond, Chris

    (Department of Economics, University of Melbourne, Australia)

  • Midrigan, Virgiliu

    (Federal Reserve Bank of Minneapolis, USA and NBER)

  • Xu, Daniel Yi

    (Department of Economics, Duke University, Durham, USA)

Abstract

We study the gains from trade in a model with endogenously variable markups. We show that the pro-competitive gains from trade are large if the economy is characterized by (i) extensive misallocation, i.e., large inefficiencies associated with markups, and (ii) a weak pattern of cross-country comparative advantage in individual sectors. We find strong evidence for both of these ingredients using producer-level data for Taiwanese manufacturing establishments. Parameterizations of the model consistent with this data thus predict large pro-competitive gains from trade, much larger than those in standard Ricardian models. In stark contrast to standard Ricardian models, data on changes in trade volume are not sufficient for determining the gains from trade.

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File URL: http://www.ihs.ac.at/publications/eco/es-299.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 299.

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Length: 49 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:ihs:ihsesp:299

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Keywords: Productivity; misallocation; comparative advantage; intra-industry trade;

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  1. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  2. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May.
  3. Michael Peters, 2011. "Heterogeneous Mark-Ups and Endogenous Misallocation," 2011 Meeting Papers 78, Society for Economic Dynamics.
  4. Richard Pomfret & Patricia Sourdin, 2008. "Why Do Trade Costs Vary?," School of Economics Working Papers 2008-08, University of Adelaide, School of Economics.
  5. Allan Collard-Wexler & John Asker & Jan De Loecker, 2011. "Productivity Volatility and the Misallocation of Resources in Developing Economies," Working Papers 11-13, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Grubel, Herbert G & Lloyd, P J, 1971. "The Empirical Measurement of Intra- Industry Trade," The Economic Record, The Economic Society of Australia, vol. 47(120), pages 494-517, December.
  7. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2009. "The dynamics of trade and competition," Journal of International Economics, Elsevier, vol. 77(1), pages 50-62, February.
  8. Epifani, Paolo & Gancia, Gino A., 2009. "Trade, Markup Heterogeneity and Misallocations," CEPR Discussion Papers 7217, C.E.P.R. Discussion Papers.
  9. Jan De Loecker & Pinelopi K. Goldberg & Amit K. Khandelwal & Nina Pavcnik, 2012. "Prices, Markups and Trade Reform," NBER Working Papers 17925, National Bureau of Economic Research, Inc.
  10. Levinsohn, J., 1991. "Testing the Imports-As-Market-Discipline Hypothesis," Working Papers 272, Research Seminar in International Economics, University of Michigan.
  11. Beatriz de Blas & Katheryn Niles Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization and Monetary Policy Institute Working Paper 67, Federal Reserve Bank of Dallas.
  12. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, National Bureau of Economic Research, Inc.
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Cited by:
  1. Allan Collard-Wexler & Jan De Loecker, 2013. "Reallocation and Technology: Evidence from the U.S. Steel Industry," NBER Working Papers 18739, National Bureau of Economic Research, Inc.
  2. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  3. Giammario Impullitti & Omar Licandro, 2010. "Trade, Firm selection, and innovation: the competition channel," UFAE and IAE Working Papers 841.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Jung, Benjamin & Felbermayr, Gabriel & Larch, Mario, 2013. "Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79707, Verein für Socialpolitik / German Economic Association.
  5. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
  6. Dalton, John T. & Goksel, Turkmen, 2013. "Firm taxation and the endogenous distribution of markups," Economics Letters, Elsevier, vol. 121(3), pages 520-523.
  7. Han QI & Haichao Fan & Edwin Lai, 2013. "Global Gains from Reduction of Trade Costs," 2013 Meeting Papers 1283, Society for Economic Dynamics.
  8. Thomas J. Holmes & Wen-Tai Hsu & Sanghoon Lee, 2013. "Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade," NBER Working Papers 19273, National Bureau of Economic Research, Inc.
  9. Michael Peters, 2013. "Heterogeneous mark-ups, growth and endogenous misallocation," LSE Research Online Documents on Economics 54254, London School of Economics and Political Science, LSE Library.
  10. Nicolas Ziebarth, 2013. "Are China and India Backwards? Evidence from the 19th Century U.S. Census of Manufactures," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 86-99, January.
  11. Pau Pujolas & Wyatt Brooks, 2013. "Trade Patterns, Income Differences and Gains from Trade," 2013 Meeting Papers 445, Society for Economic Dynamics.

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