Misallocation under trade liberalization

Yan Bai, Keyu Jin and Dan Lu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper formalizes a classic idea that in second-best environments trade can induce welfare losses: incremental income losses from distortions can outweigh trade gains. In a Melitz model with distortionary taxes, we derive sufficient statistics for welfare gains/losses and show departures from the efficient case (Arkolakis, Costinot, and Rodríguez-Clare 2012) can be captured by the gap between an input and output share and domestic extensive margin elasticities. The loss reflects an endogenous selection of more subsidized firms into exporting. Using Chinese manufacturing data in 2005 and model-inferred firm-level distortions, we demonstrate that a sizable negative fiscal externality can potentially offset conventional gains.

JEL-codes: F14 H25 L60 O19 P31 P33 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2024-07-01
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (1)

Published in American Economic Review, 1, July, 2024, 114(7), pp. 1949 - 1985. ISSN: 0002-8282

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http://eprints.lse.ac.uk/124221/ Open access version. (application/pdf)

Related works:
Journal Article: Misallocation under Trade Liberalization (2024)
Working Paper: Misallocation Under Trade Liberalization (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:124221

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