Capital-Reallocation Frictions and Trade Shocks

91 Pages Posted: 3 Jun 2020 Last revised: 27 Jul 2020

See all articles by Andrea Lanteri

Andrea Lanteri

Duke University - Department of Economics

Pamela Medina

University of Toronto - Rotman School of Management

Eugene Tan

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

What are the short- and medium-term effects of an import-competition shock on firm dynamics and aggregate productivity? We address this question by combining detailed data on investment dynamics of Peruvian manufacturing firms, data on trade flows from China, and a quantitative general-equilibrium model with heterogeneous firms subject to idiosyncratic shocks. In the data, we find evidence of substantial frictions that slow capital reallocation, by rendering disinvestment and firm exit costly. In our model, these frictions shape the transitional dynamics after a trade shock. On impact, a drop in output prices due to import competition induces a spike in inaction, and exit of some productive firms, consistent with our empirical evidence. These effects expand the aggregate productivity wedge relative to a frictionless benchmark. Overall, productivity gains materialize slowly over time, whereas welfare gains emerge early in the transition.

Keywords: capital reallocation, Firm Dynamics, Investment Irreversibility, Trade Shocks

Suggested Citation

Lanteri, Andrea and Medina, Pamela and Tan, Eugene, Capital-Reallocation Frictions and Trade Shocks (May 2020). CEPR Discussion Paper No. DP14832, Available at SSRN: https://ssrn.com/abstract=3615595

Andrea Lanteri (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Pamela Medina

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Eugene Tan

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
45
PlumX Metrics