TY - JOUR
T1 - Trade, markup heterogeneity and misallocations
AU - Epifani, Paolo
AU - Gancia, Gino
N1 - Funding Information:
We would like to thank Giancarlo Corsetti, Jonathan Eaton, Nezih Guner, Winfried Koeniger, Omar Licandro, Enrico Sette, Guido Tabellini, Jaume Ventura, Fabrizio Zilibotti and an anonymous referee for the helpful comments and discussion. We also thank participants at the EEA Annual Congress (Barcelona, 2009), ITSG Meeting (Cagliari, 2009), RIEF Meeting (Aix-an-Provence, 2009), ESSIM (Tarragona, 2008), XXXII Symposium of Economic Analysis (Granada, 2007), Universidad Carlos III de Madrid, Banco de España, the UPF Faculty Lunch, the Macro Workshop at IEW, Zurich University and the IADB-ELSNIT (Paris, 2006). All errors are our own. Gino Gancia acknowledges financial support from the Barcelona GSE , the Government of Catalonia ( 2009SGR1157 ) and the ERC Grant GOPG 240989 . Part of this research was done while Gino Gancia was visiting as Research Associate the Chair of Political Economy and Macroeconomics of the IEW-University of Zurich. We thank the IEW for the hospitality.
PY - 2011/1
Y1 - 2011/1
N2 - Markups vary widely across industries and countries, their heterogeneity has increased overtime and asymmetric exposure to international trade seems partly responsible for this phenomenon. In this paper, we study how the entire distribution of markups affects resource misallocation and welfare in a general equilibrium framework encompassing a large class of models with imperfect competition. We then identify conditions under which trade opening, by changing the distribution of markups, may reduce welfare. Our approach is novel both in its generality and in the emphasis on the second moment of the markup distribution. Two broad policy recommendations stand out from the analysis. First, whenever there is heterogeneity in markups, be it due to trade or other distortions, there is also an intersectoral misallocation, so that the equilibrium can be improved upon with an appropriate intervention. This suggests that trade liberalization and domestic industrial policy are complementary. Second, ensuring free entry is a crucial precondition to prevent adverse effects from asymmetric trade opening.
AB - Markups vary widely across industries and countries, their heterogeneity has increased overtime and asymmetric exposure to international trade seems partly responsible for this phenomenon. In this paper, we study how the entire distribution of markups affects resource misallocation and welfare in a general equilibrium framework encompassing a large class of models with imperfect competition. We then identify conditions under which trade opening, by changing the distribution of markups, may reduce welfare. Our approach is novel both in its generality and in the emphasis on the second moment of the markup distribution. Two broad policy recommendations stand out from the analysis. First, whenever there is heterogeneity in markups, be it due to trade or other distortions, there is also an intersectoral misallocation, so that the equilibrium can be improved upon with an appropriate intervention. This suggests that trade liberalization and domestic industrial policy are complementary. Second, ensuring free entry is a crucial precondition to prevent adverse effects from asymmetric trade opening.
KW - Dispersion of market power
KW - Markups
KW - Procompetitive effect
KW - Trade and welfare
UR - http://www.scopus.com/inward/record.url?scp=78650817221&partnerID=8YFLogxK
U2 - 10.1016/j.jinteco.2010.10.005
DO - 10.1016/j.jinteco.2010.10.005
M3 - Article
AN - SCOPUS:78650817221
SN - 0022-1996
VL - 83
SP - 1
EP - 13
JO - Journal of International Economics
JF - Journal of International Economics
IS - 1
ER -