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Productivity Matters for Trade Policy: Theory and Evidence

  • Baybars Karacaovali

    (Fordham University, Department of Economics)

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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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
Contact details of provider: Web page: http://www.fordham.edu/economics/
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