NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade

Thomas J. Holmes, Wen-Tai Hsu, Sanghoon Lee

NBER Working Paper No. 19273
Issued in August 2013
NBER Program(s):   ITI   PR

This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.

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Document Object Identifier (DOI): 10.3386/w19273

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