Trade, Productivity and (Mis)Allocation
76 Pages Posted: 1 Jan 2020 Last revised: 8 Oct 2021
Date Written: December 10, 2019
We examine the gains from trade in the presence of firm heterogeneity and resource misallocation. Theoretically, we show that measured domestic aggregate productivity (Φ) captures the effective productive capacity of an economy with or without distortions. However, it is generally 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 Φ, but import liberalization has ambiguous effects. Misallocation can amplify, dampen or reverse these gains from trade. Empirically, we then use unique new data on 14 European countries and 20 industries in 1998-2011, and establish that exogenous rises in export demand and import competition both increased Φ in this sample. Further empirical analysis suggests that these effects operated through reallocations across firms in the presence of distortions, with important asymmetries between export and import shocks: (i) Both export and import expansion increased effective average firm productivity, but the former also shifted activity towards firms with higher effective productivity, while the latter acted in reverse. (ii) Both trade shocks increased minimum effective firm productivity, but the latter was not a sufficient statistic for Φ. (iii) Efficient institutions, factor and product markets amplified the gains from import competition, but dampened those from export access.
Keywords: International trade, export demand, import competition, productivity, allocative efficiency, misallocation
JEL Classification: F10, F14, F43, F62, O24, O40, O47
Suggested Citation: Suggested Citation