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Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade

  • Thomas J. Holmes
  • Wen-Tai Hsu
  • Sanghoon Lee

This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.

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File URL: http://www.nber.org/papers/w19273.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19273.

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Date of creation: Aug 2013
Publication status: published as Holmes, Thomas J. & Hsu, Wen-Tai & Lee, Sanghoon, 2014. "Allocative efficiency, mark-ups, and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 94(2), pages 195-206.
Handle: RePEc:nbr:nberwo:19273
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