TY  - BOOK
AU  - Bai, Yan
AU  -  Jin, Keyu
AU  -  Lu, Dan
TI  - Misallocation under Trade Liberalization
SN  - 0002-8282
PB  - American Economic Review
KW  -  Business Taxes
KW  -  Empirical Studies of Trade
KW  -  Industry Studies
KW  -  International Linkages to Development
KW  -  Socialist Enterprises
KW  - Firm Behavior
N2  - 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 Rodriguez-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
UR  - https://www.aeaweb.org/articles?id=10.1257/aer.20200596
ER  -