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Import-competition, market power and productivity change

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  • Traca, Daniel A.

Abstract

We explore how the competitive pressure of imports affects productivity, at the firm level. There are two conflicting effects of import-competition: the pro-competitive effect fosters productivity, while the direct effect hinders it. The pro-competitive effect dominates in the steady-state, yielding free-trade as the optimal long run policy. However, under a large initial productivity gap, the firm shuts down. Here, a temporary tariff sways the firm to fight, and ensures survival, which is welfare increasing. Trade liberalization, around the steady-state, increases productivity growth and closes the gap. However, a radical liberalization kills the domestic firm. Gradualism increases the likelihood of survival, and increases welfare.

Suggested Citation

  • Traca, Daniel A., 1997. "Import-competition, market power and productivity change," Discussion Papers, Research Unit: Market Dynamics FS IV 97-29, WZB Berlin Social Science Center.
    • Handle: RePEc:zbw:wzbmdy:fsiv9729
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    Cited by:

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    2. Fernandes, Ana M., 2007. "Trade policy, trade volumes and plant-level productivity in Colombian manufacturing industries," Journal of International Economics, Elsevier, vol. 71(1), pages 52-71, March.

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