Working Paper: CEPR ID: DP4634
Authors: Richard Baldwin; Frédéric Robert-Nicoud
Abstract: Melitz (2003) demonstrates that greater trade openness raises industry productivity via a selection effect and via a production re-allocation effect. Our comment points out that the set-up assumed in the Melitz model displays a trade off between static and dynamic efficiency gains. That is, although freer trade improves industry productivity in a level sense, it harms it in a growth sense. To make this point as simply as possible, we introduce a slight modification to the model that endogenises the growth rate of industry productivity and we show that liberalization slows growth.
Keywords: Dynamic versus static efficiency; Endogenous growth; Heterogeneous firms; Trade liberalization
JEL Codes: H32; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater trade openness (F19) | increase in industry productivity (O49) |
| selection effect (C24) | lower maximum marginal cost of active firms (D21) |
| production reallocation effect (F16) | production shifts to the most productive firms (D21) |
| freer trade (F19) | improve productivity levels (O49) |
| freer trade (F19) | harm growth rates (O40) |
| greater trade openness (F19) | potential negative correlation with sectoral productivity (O49) |
| freer trade (F19) | slow growth rate of new varieties (O41) |
| slow growth rate of new varieties (O41) | affects measured productivity growth (O49) |