Misallocation Under Trade Liberalization

97 Pages Posted: 3 Sep 2019 Last revised: 23 Jul 2021

See all articles by Yan Bai

Yan Bai

University of Rochester - Department of Economics

Keyu Jin

London School of Economics & Political Science (LSE)

Dan Lu

University of Rochester

Date Written: August 2019

Abstract

This paper formalizes a classic idea that in second-best environments trade can induce welfare losses. In a framework that incorporates distortion wedges into a Melitz model, we analyze a channel in which trade can reduce allocative efficiency arising from the reallocation of resources. A key aggregate statistics that captures this negative selection is the gap between input and output shares. We derive sufficient conditions for reallocation loss due to trade under important distributions. Using Chinese manufacturing data, we show that this reallocation term is significantly negative, largely offsetting conventional gains to trade.

Suggested Citation

Bai, Yan and Jin, Keyu and Lu, Dan, Misallocation Under Trade Liberalization (August 2019). NBER Working Paper No. w26188, Available at SSRN: https://ssrn.com/abstract=3446494

Yan Bai (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Keyu Jin

London School of Economics & Political Science (LSE) ( email )

Dan Lu

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

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