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Trade, Markup Heterogeneity and Misallocations

  • Paolo Epifani

    ()

    (KITeS, Universita' Bocconi, Milano, Italy)

  • Gino Gancia

    (CREI, UPF and CEPR)

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 re- source 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 distri- bution. 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 appropri- ate 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 KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number 005.

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Length: 34 pages
Date of creation: Apr 2009
Date of revision: Apr 2009
Handle: RePEc:cri:cespri:wp232
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