Discussion paper

DP13976 Misallocation Under Trade Liberalization

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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Citation

Jin, K (2019), “DP13976 Misallocation Under Trade Liberalization”, CEPR Press Discussion Paper No. 13976. https://cepr.org/publications/dp13976