Misallocation Under Trade Liberalization

Yan Bai, Keyu Jin and Dan Lu

No 26188, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper formalises a classic idea that in second-best environments trade can induce welfare losses: gains accrued can be outweighed by incremental income losses stemming from distortions. In a Melitz model with distortionary taxes, we derive sufficient statistics for welfare gains from trade, and show that its departure from the efficient case (ACR) can be captured by the gap between an input and output share and domestic extensive margin elasticities. The loss reflects the impact of an endogenous selection of more subsidized firms into exporting. We show sufficient conditions under which conventional formulas overestimate trade gains as well as conditions under which welfare losses can occur. Using Chinese manufacturing data, we demonstrate by taking into account firm-level distortions, welfare losses largely offset conventional gains to trade.

JEL-codes: E23 F12 F14 F63 L25 O47 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-int and nep-mac
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Citations: View citations in EconPapers (23)

Published as Yan Bai & Keyu Jin & Dan Lu, 2024. "Misallocation under Trade Liberalization," American Economic Review, vol 114(7), pages 1949-1985.

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Journal Article: Misallocation under Trade Liberalization (2024)
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