Working Paper: CEPR ID: DP14832
Authors: Andrea Lanteri; Pamela Medina; Eugene Tan
Abstract: What are the short- and medium-term effects of an import-competition shock on firm dynamics and aggregate productivity? We address this question by combining detailed data on investment dynamics of Peruvian manufacturing firms, data on trade flows from China, and a quantitative general-equilibrium model with heterogeneous firms subject to idiosyncratic shocks. In the data, we find evidence of substantial frictions that slow capital reallocation, by rendering disinvestment and firm exit costly. In our model, these frictions shape the transitional dynamics after a trade shock. On impact, a drop in output prices due to import competition induces a spike in inaction, and exit of some productive firms, consistent with our empirical evidence. These effects expand the aggregate productivity wedge relative to a frictionless benchmark. Overall, productivity gains materialize slowly over time, whereas welfare gains emerge early in the transition.
Keywords: capital reallocation; investment; irreversibility; trade shocks; firm dynamics
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital reallocation frictions (F16) | slow productivity gains (O49) |
| high capital stocks (E22) | less likely to exit even if productivity is low (J29) |
| trade shock (F14) | gradual productivity improvements (O49) |
| trade shock (F14) | welfare gains appear earlier in the transition (D69) |
| import competition (L13) | decreased output prices (L11) |
| decreased output prices (L11) | inaction and exit of productive firms (L19) |
| import competition (L13) | inaction and exit of productive firms (L19) |