Allocative efficiency,mark-ups,and the welfare gains from trade |
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| Institution: | 1. Department of Economics, the University of Minnesota, United States;2. School of Economics, Singapore Management University, Singapore;3. Sauder School of Business, the University of British Columbia, Canada;4. Federal Reserve Bank of Minneapolis, United States;5. The National Bureau of Economic Research, United States;1. Michigan State University, United States;2. The Research Institute of Industrial Economics, Sweden;3. Lund University, Sweden;1. Research School of Economics, College of Business and Economics, Australian National University, ACT 0020, Australia;2. Department of Economics, McMaster University, Hamilton, ON L8S 4M4, Canada;3. Development Research Group — Trade, The World Bank, 1818 H ST NW (MSN MC3-303), Washington, DC 20433, United States;4. Department of Economics, Pennsylvania State University, University Park, PA 16802, United States;5. NBER, United States;1. University of Munich, Germany;2. Paris School of Economics — ENPC, France;1. Federal Reserve Bank of Philadelphia, United States;2. University of Rochester, United States;3. Monash University, Australia |
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| Abstract: | This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods and is separable from an index of standard Ricardian gains from trade. 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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