Misallocation Under Trade Liberalization
No 13976, CEPR Discussion Papers from C.E.P.R. Discussion Papers
This paper incorporates firm-level distortions into a Melitz model and characterizes welfare under misallocation. We derive an analogue to the well-known ACR result in an economy with distortions. We highlight a channel through which trade can reduce welfare by exacerbating misallocation. A key statistic to infer welfare is the gap between input and output shares. Using Chinese manufacturing data for quantitative analysis, we show that trade integration can lead to a 18% welfare loss coming from a reduction in allocative efficiency. The overall gains to trade is substantially smaller than implied by standard calculations.
Keywords: Capital and labor wedges; Gains from trade; industrial policy; Misallocation; trade liberalization (search for similar items in EconPapers)
JEL-codes: E23 F12 F14 F63 L25 O47 (search for similar items in EconPapers)
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