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Misallocation Under Trade Liberalization

Author

Listed:
  • Yan Bai
  • Keyu Jin
  • Dan Lu

Abstract

This paper formalises a classic idea that in second-best environments trade can induce welfare losses: gains accrued can be outweighed by incremental income losses stemming from distortions. In a Melitz model with distortionary taxes, we derive sufficient statistics for welfare gains from trade, and show that its departure from the efficient case (ACR) can be captured by the gap between an input and output share and domestic extensive margin elasticities. The loss reflects the impact of an endogenous selection of more subsidized firms into exporting. We show sufficient conditions under which conventional formulas overestimate trade gains as well as conditions under which welfare losses can occur. Using Chinese manufacturing data, we demonstrate by taking into account firm-level distortions, welfare losses largely offset conventional gains to trade.

Suggested Citation

  • Yan Bai & Keyu Jin & Dan Lu, 2019. "Misallocation Under Trade Liberalization," NBER Working Papers 26188, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26188
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    References listed on IDEAS

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    1. Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, American Economic Association, vol. 109(7), pages 2531-2567, July.
    2. Asturias, Jose & Hur, Sewon & Kehoe, Timothy J. & Ruhl, Kim J., 2016. "The interaction and sequencing of policy reforms," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 45-66.
    3. Yan Bai & Dan Lu & Xu Tian, 2018. "Do Financial Frictions Explain Chinese Firms’ Saving and Misallocation?," NBER Working Papers 24436, National Bureau of Economic Research, Inc.
    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    Cited by:

    1. Richard Hornbeck & Martin Rotemberg, 2019. "Railroads, Reallocation, and the Rise of American Manufacturing," NBER Working Papers 26594, National Bureau of Economic Research, Inc.
    2. Tetenyi, Laszlo, 2019. "Trade, misallocation, and capital market integration," IWH-CompNet Discussion Papers 8/2019, Halle Institute for Economic Research (IWH).
    3. Anderson, Ronald W., 2020. "Who bears risk in China's non-financial enterprise debt?," LSE Research Online Documents on Economics 118879, London School of Economics and Political Science, LSE Library.
    4. Manova, Kalina & Berthou, Antoine & Sandoz, Charlotte & Chung, John Jong-Hyun, 2019. "Trade, Productivity and (Mis)allocation," CEPR Discussion Papers 14203, C.E.P.R. Discussion Papers.
    5. David Kohn & Fernando Leibovici & Michal Szkup, 2021. "Financial Frictions and International Trade," Working Papers 2021-009, Federal Reserve Bank of St. Louis.
    6. Mark Bils, 2017. "Misallocation or Mismeasurement?," 2017 Meeting Papers 715, Society for Economic Dynamics.
    7. Andrea Lanteri & Pamela Medina & Eugene Tan, 2023. "Capital-Reallocation Frictions and Trade Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 190-228, April.
    8. Maria D. Tito & Ruoying Wang, 2021. "Misallocation in Open Economy," Finance and Economics Discussion Series 2021-007, Board of Governors of the Federal Reserve System (U.S.).
    9. Bils, Mark & Klenow, Peter J. & Ruane, Cian, 2021. "Misallocation or Mismeasurement?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 39-56.
    10. Anderson, Ronald, 2020. "Who Bears Risk in China's Non-financial Enterprise Debt?," CEPR Discussion Papers 15135, C.E.P.R. Discussion Papers.
    11. Laszlo Tetenyi, 2021. "Trade, Misallocation, and Capital Market Integration," Working Papers w202119, Banco de Portugal, Economics and Research Department.
    12. Kaoru Hosono & Miho Takizawa, 2022. "Japan's productivity stagnation: Using dynamic Hsieh–Klenow decomposition," Contemporary Economic Policy, Western Economic Association International, vol. 40(1), pages 218-232, January.
    13. Huang, Yi & Sheng, Liugang & Wang, Gewei, 2021. "How did rising labor costs erode China’s global advantage?," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 632-653.
    14. Feng, Xiao & Wang, Yongjin & Zhao, Laixun, 2022. "Export capacity constraints and distortions," Journal of Development Economics, Elsevier, vol. 157(C).

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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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