Trade, Productivity and (Mis)Allocation

Abstract

We examine the gains from globalization in the presence of firm heterogeneity and resource misallocation. Theoretically, we show that measured domestic aggregate productivity (AggProd) captures an economy’s effective productive capacity with or without distortions. However, it is not monotonic with welfare (W), which depends on the degree of misallocation and the prices of both domestic and imported varieties. Under allocative efficiency, bilateral and export liberalizations increase W and AggProd, but import liberalization has ambiguous effects. Misallocation can amplify, dampen or reverse these gains. Empirically, we use unique data on 14 European countries and 20 industries in 1998-2011, and establish that exogenous rises in export demand and import competition both increased AggProd in this sample. Further analysis suggests that these effects operated through reallocations across firms in the presence of distortions. Among others, efficient institutions, factor and product markets amplified the gains from import competition, but dampened those from export access.

Keywords: Gains from trade, aggregate productivity, allocative efficiency, misallocation