Discussion Paper Details

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Title: Misallocation Under Trade Liberalization

Author(s): Keyu Jin

Publication Date: September 2019

Keyword(s): Capital and labor wedges, Gains from trade, industrial policy, Misallocation and trade liberalization

Programme Area(s): International Trade and Regional Economics

Abstract: 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.

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Bibliographic Reference

Jin, K. 2019. 'Misallocation Under Trade Liberalization'. London, Centre for Economic Policy Research.