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Misallocation under trade liberalization

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  • Bai, Yan
  • Jin, Keyu
  • Lu, Dan

Abstract

This paper formalizes a classic idea that in second-best environments trade can induce welfare losses: incremental income losses from distortions can outweigh trade gains. In a Melitz model with distortionary taxes, we derive sufficient statistics for welfare gains/losses and show departures from the efficient case (Arkolakis, Costinot, and Rodríguez-Clare 2012) can be captured by the gap between an input and output share and domestic extensive margin elasticities. The loss reflects an endogenous selection of more subsidized firms into exporting. Using Chinese manufacturing data in 2005 and model-inferred firm-level distortions, we demonstrate that a sizable negative fiscal externality can potentially offset conventional gains.

Suggested Citation

  • Bai, Yan & Jin, Keyu & Lu, Dan, 2024. "Misallocation under trade liberalization," LSE Research Online Documents on Economics 124221, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:124221
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    Cited by:

    1. Andrea Lanteri & Pamela Medina & Eugene Tan, 2023. "Capital-Reallocation Frictions and Trade Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 190-228, April.
    2. Manova, Kalina & Berthou, Antoine & Sandoz, Charlotte & Chung, John Jong-Hyun, 2019. "Trade, Productivity and (Mis)allocation," CEPR Discussion Papers 14203, C.E.P.R. Discussion Papers.
    3. Richard Hornbeck & Martin Rotemberg, 2019. "Railroads, Reallocation, and the Rise of American Manufacturing," NBER Working Papers 26594, National Bureau of Economic Research, Inc.
    4. Tetenyi, Laszlo, 2019. "Trade, misallocation, and capital market integration," IWH-CompNet Discussion Papers 8/2019, Halle Institute for Economic Research (IWH).
    5. Anderson, Ronald W., 2020. "Who bears risk in China's non-financial enterprise debt?," LSE Research Online Documents on Economics 118879, London School of Economics and Political Science, LSE Library.
    6. Mark Bils, 2017. "Misallocation or Mismeasurement?," 2017 Meeting Papers 715, Society for Economic Dynamics.
    7. Li, Xiaolu & Ma, Lin & Tang, Yang, 2024. "Migration and resource misallocation in China," Journal of Development Economics, Elsevier, vol. 167(C).
    8. Farrokhi, Farid & Lashkaripour, Ahmad & Pellegrina, Heitor S., 2024. "Trade and technology adoption in distorted economies," Journal of International Economics, Elsevier, vol. 150(C).
    9. Bils, Mark & Klenow, Peter J. & Ruane, Cian, 2021. "Misallocation or Mismeasurement?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 39-56.
    10. Anderson, Ronald, 2020. "Who Bears Risk in China's Non-financial Enterprise Debt?," CEPR Discussion Papers 15135, C.E.P.R. Discussion Papers.
    11. David Kohn & Fernando Leibovici & Michal Szkup, 2021. "Financial Frictions and International Trade," Documentos de Trabajo 563, Instituto de Economia. Pontificia Universidad Católica de Chile..
    12. Siying Ding & Ahmad Lashkaripour & Volodymyr Lugovskyy, 2024. "A Global Perspective on the Incidence of Monopoly Distortions," CESifo Working Paper Series 11211, CESifo.
    13. Maria D. Tito & Ruoying Wang, 2021. "Misallocation in Open Economy," Finance and Economics Discussion Series 2021-007, Board of Governors of the Federal Reserve System (U.S.).
    14. Laszlo Tetenyi, 2021. "Trade, Misallocation, and Capital Market Integration," Working Papers w202119, Banco de Portugal, Economics and Research Department.
    15. Kaoru Hosono & Miho Takizawa, 2022. "Japan's productivity stagnation: Using dynamic Hsieh–Klenow decomposition," Contemporary Economic Policy, Western Economic Association International, vol. 40(1), pages 218-232, January.
    16. Huang, Yi & Sheng, Liugang & Wang, Gewei, 2021. "How did rising labor costs erode China’s global advantage?," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 632-653.
    17. Feng, Xiao & Wang, Yongjin & Zhao, Laixun, 2022. "Export capacity constraints and distortions," Journal of Development Economics, Elsevier, vol. 157(C).
    18. Xie, Enze & Xu, Mingzhi & Yu, Miaojie, 2024. "Trade liberalization, labor market power, and misallocation across firms: Evidence from China's WTO accession," Journal of Development Economics, Elsevier, vol. 171(C).

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    More about this item

    JEL classification:

    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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