Misallocation under trade liberalization

Bai, Yan, Jin, Keyu ORCID: 0000-0002-0139-799X and Lu, Dan (2024) Misallocation under trade liberalization. American Economic Review, 114 (7). 1949 - 1985. ISSN 0002-8282

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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.

Item Type:	Article
Official URL:	https://www.aeaweb.org/journals/aer
Additional Information:	© 2024 American Economic Association
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	L - Industrial Organization > L6 - Industry Studies: Manufacturing > L60 - General F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development; Role of International Organizations P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P31 - Socialist Enterprises and Their Transitions P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P33 - International Trade, Finance, Investment, and Aid
Date Deposited:	12 Jul 2024 10:39
Last Modified:	12 Dec 2024 04:22
URI:	http://eprints.lse.ac.uk/id/eprint/124221

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