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Misallocation Under Trade Liberalization


  • Yan Bai
  • Keyu Jin
  • Dan Lu


This paper formalizes a classic idea that in second-best environments trade can induce welfare losses. In a framework that incorporates distortion wedges into a Melitz model, we analyze a channel in which trade can reduce allocative efficiency arising from the reallocation of resources. A key aggregate statistics that captures this negative selection is the gap between input and output shares. We derive sufficient conditions for reallocation loss due to trade under important distributions. Using Chinese manufacturing data, we show that this reallocation term is significantly negative, largely offsetting 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

    1. 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.
    2. Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, American Economic Association, vol. 109(7), pages 2531-2567, July.
    3. 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.
    4. 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.
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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. Berthou, Antoine & Chung, John Jong-Hyun & Manova, Kalina & Sandoz, Charlotte, 2019. "Trade, Productivity and (Mis)allocation," CEPR Discussion Papers 14203, C.E.P.R. Discussion Papers.
    4. David Kohn & Fernando Leibovici & Michal Szkup, 2021. "Financial Frictions and International Trade," Working Papers 2021-009, Federal Reserve Bank of St. Louis.
    5. Mark Bils, 2017. "Misallocation or Mismeasurement?," 2017 Meeting Papers 715, Society for Economic Dynamics.
    6. 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.).
    7. Bils, Mark & Klenow, Peter J. & Ruane, Cian, 2021. "Misallocation or Mismeasurement?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 39-56.
    8. Anderson, Ronald W., 2020. "Who Bears Risk in China's Non-financial Enterprise Debt?," CEPR Discussion Papers 15135, C.E.P.R. Discussion Papers.
    9. Laszlo Tetenyi, 2021. "Trade, Misallocation, and Capital Market Integration," Working Papers w202119, Banco de Portugal, Economics and Research Department.
    10. 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.
    11. 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.
    12. Xiao Feng & Yongjin Wang & Laixun Zhao, 2022. "Export Capacity Constraints and Distortions," Discussion Paper Series DP2022-20, Research Institute for Economics & Business Administration, Kobe University.
    13. 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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