NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Misallocation Under Trade Liberalization

Yan Bai, Keyu Jin, Dan Lu

NBER Working Paper No. 26188
Issued in August 2019
NBER Program(s):International Finance and Macroeconomics, International Trade and Investment

This paper incorporates firm-level distortions into a Melitz model and characterizes welfare under misallocation. We derive an analogue to the well-known ACR result in an economy with distortions. We highlight a channel through which trade can reduce welfare by exacerbating misallocation. A key statistic to infer welfare is the gap between input and output shares. Using Chinese manufacturing data for quantitative analysis, we show that trade integration can lead to a 18% welfare loss coming from a reduction in allocative efficiency. The overall gains to trade is substantially smaller than implied by standard calculations.

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Document Object Identifier (DOI): 10.3386/w26188

  
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