Working Paper: NBER ID: w19273
Authors: Thomas J. Holmes; Wentai Hsu; Sanghoon Lee
Abstract: This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.
Keywords: allocative efficiency; markups; welfare gains; trade
JEL Codes: D61; F10; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reducing trade frictions (F13) | increases allocative efficiency (D61) |
| reducing trade frictions (F13) | raises markups closer to the average (D43) |
| cost-change channel (D49) | enhances allocative efficiency (D61) |
| price-change channel (E30) | ambiguous effects on allocative efficiency (D61) |
| decrease in trade frictions (inelastic demand) (F19) | enhances allocative efficiency (D61) |
| decrease in trade frictions (elastic demand) (F19) | decrease in allocative efficiency (D61) |