Capital-Reallocation Frictions and Trade Shocks

Andrea Lanteri, Pamela Medina and Eugene Tan

No 14832, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: What are the short- and medium-term effects of an import-competition shock on firm dynamics and aggregate productivity? We address this question by combining detailed data on investment dynamics of Peruvian manufacturing firms, data on trade flows from China, and a quantitative general-equilibrium model with heterogeneous firms subject to idiosyncratic shocks. In the data, we find evidence of substantial frictions that slow capital reallocation, by rendering disinvestment and firm exit costly. In our model, these frictions shape the transitional dynamics after a trade shock. On impact, a drop in output prices due to import competition induces a spike in inaction, and exit of some productive firms, consistent with our empirical evidence. These effects expand the aggregate productivity wedge relative to a frictionless benchmark. Overall, productivity gains materialize slowly over time, whereas welfare gains emerge early in the transition.

Keywords: Capital reallocation; Investment irreversibility; Trade shocks; Firm dynamics (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-bec, nep-dge, nep-eff, nep-int and nep-mac
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Capital-Reallocation Frictions and Trade Shocks (2023)
Working Paper: Capital-Reallocation Frictions and Trade Shocks (2019)
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