Working Paper: CEPR ID: DP17083
Authors: Laurent Cavenaile; Pau Roldanblanco; Tom Schmitz
Abstract: Over the last decades, the United States has experienced a secular increase in market concentration and markups, as well as a doubling of the trade-to-GDP ratio. Our paper argues that these trends could be linked, pointing out an “innovation feedback effect” of trade. Lower trade costs increase innovation incentives for large global firms, and as the winners of the ensuing innovation races increase their technological advantage over global competitors and local firms, concentration and markups rise. To make this point formally, we develop a dynamic general equilibrium trade model with endogenous markups and endogenous innovation. We calibrate our model to US manufacturing data, and show that an increase in trade openness (consistent with the one observed between 1989 and 2007) increases the aggregate markup by 3.5 percentage points. This increase is entirely due to firms’ innovation response: without this response, markups would have fallen by 4 percentage points.
Keywords: international trade; markups; innovation
JEL Codes: F43; F60; L13; O31; O32; O33; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower trade costs (F19) | Increased innovation incentives for large global firms (O31) |
| Increased innovation incentives for large global firms (O31) | Higher market concentration and markups (D43) |
| Lower trade costs (F19) | Higher market concentration and markups (D43) |
| Increased innovation incentives for large global firms (O31) | Increased aggregate markups (D43) |
| Without innovation response (O35) | Decreased markups (D43) |
| Lower trade costs (F19) | Increased aggregate markups (D43) |
| Innovation feedback effect (O36) | Polarization of productivity distribution (D39) |