Working Paper: CEPR ID: DP13976
Authors: Keyu Jin; Yan Bai; Dan Lu
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.
Keywords: capital and labor wedges; misallocation; trade liberalization; gains from trade; industrial policy
JEL Codes: E23; F12; F14; F63; L25; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade integration (F15) | welfare loss (D69) |
| misallocation (D61) | welfare loss (D69) |
| domestic distortions (H31) | misallocation (D61) |
| trade integration (F15) | misallocation (D61) |
| distortions (H31) | expected gains from trade (F11) |
| trade (F19) | productivity (O49) |
| trade (F19) | welfare (I38) |