Misallocation under trade liberalization
By: Bai, Yan Jin, Keyu and Lu, Dan
.
Material type: 
BookPublisher: The American Economic Review Description: 114(7), Jul, 2024: p.1949-1985.Subject(s): International Economics, Trade Liberalization, Misallocation, Welfare Losses, Distortionary Taxes, Melitz Model, Sufficient Statistics, Firm Selection, Subsidized Exporters, Fiscal Externality, Chinese Manufacturing, Industrial Economics, Trade Theory
In:
The American Economic ReviewSummary: This paper formalizes the classic idea that in second-best environments, trade liberalization can induce welfare losses when incremental income losses from distortions outweigh conventional trade gains. Using a Melitz model with distortionary taxes, the study derives sufficient statistics for welfare gains and losses, showing that departures from the efficient benchmark (Arkolakis, Costinot, and Rodríguez-Clare 2012) can be captured by the gap between input and output shares and domestic extensive margin elasticities. The welfare loss reflects an endogenous selection of more subsidized firms into exporting. Applying the framework to Chinese manufacturing data from 2005 and model-inferred firm-level distortions, the paper demonstrates that sizable negative fiscal externalities can potentially offset the expected gains from trade liberalization. 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.- Reproduced
https://www.aeaweb.org/articles?id=10.1257/aer.20200596
| Item type | Current location | Call number | Vol info | Status | Date due | Barcode |
|---|---|---|---|---|---|---|
Articles
|
Indian Institute of Public Administration | 114(7), Jul, 2024: p.1949-1985 | Available | AR133270 |
This paper formalizes the classic idea that in second-best environments, trade liberalization can induce welfare losses when incremental income losses from distortions outweigh conventional trade gains. Using a Melitz model with distortionary taxes, the study derives sufficient statistics for welfare gains and losses, showing that departures from the efficient benchmark (Arkolakis, Costinot, and Rodríguez-Clare 2012) can be captured by the gap between input and output shares and domestic extensive margin elasticities. The welfare loss reflects an endogenous selection of more subsidized firms into exporting. Applying the framework to Chinese manufacturing data from 2005 and model-inferred firm-level distortions, the paper demonstrates that sizable negative fiscal externalities can potentially offset the expected gains from trade liberalization. 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.- Reproduced
https://www.aeaweb.org/articles?id=10.1257/aer.20200596
There are no comments for this item.