Trade liberalization, labor market power, and misallocation across firms: Evidence from China's WTO accession

Enze Xie, Mingzhi (Jimmy) Xu and Miaojie Yu

Journal of Development Economics, 2024, vol. 171, issue C

Abstract: This paper studies the impact of trade liberalization on the heterogeneity of labor market power among manufacturing firms, which is a potential source of misallocation. The model shows that heterogeneity of labor market power distorts the allocation of the factors of production, and the variance in the natural log of the markdown serves as a sufficient statistic to infer its negative impact on overall production efficiency. Using China's accession to the World Trade Organization (WTO) as a natural experiment, the empirical results suggest that lower input tariffs decrease the variance in the natural log of the markdown, which reflects the improvement in misallocation. In contrast, reductions in output tariffs have no significant effects.

Keywords: Heterogeneous monopsony power; Misallocation; Trade liberalization; Markdown distribution (search for similar items in EconPapers)
JEL-codes: F12 F14 F16 J42 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:171:y:2024:i:c:s0304387824001020

DOI: 10.1016/j.jdeveco.2024.103353

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