We develop a multi-sector gravity model with heterogeneous workers to quantify the aggregate and group-level welfare effects of trade. The model generalizes the specific-factors intuition to a setting with labor reallocation, leads to a simple formula for the group-level welfare effects from trade, and nests the aggregate results in Arkolakis, Costinot and Rodríguez-Clare (2012). At the same time, our analytical results on the distributional effects of trade provide a structural framework for the empirical study of group-level changes in import-competition. We estimate the model using the structural relationship between China-shock driven changes in manufacturing employment and average earnings across US groups defined by commuting zone and education. We find that the China shock increases average welfare but some groups experience losses as high as five times the average gain. Adjusted for plausible measures of inequality aversion, gains in social welfare are positive and only slightly lower than with the standard aggregation.
This paper develops a novel general-equilibrium model of the relationship between competition, financial constraints and misallocation, and tests its implications using Indian plant-level panel data. In the model, steady-state misallocation consists of both variable markups and capital wedges. The variable markups arise from Cournot-type competition, whereas the capital wedges result from the interaction of firm-level productivity volatility with financial constraints. Firms experience random shocks to their productivity and in response to positive productivity shocks they optimally grow their capital stock, subject to financial constraints. Competition plays a dual role in affecting misallocation. On the one hand, both markup levels and markup dispersion tend to fall with competition, which unambiguously improves allocative efficiency in a setting without financial constraints. On the other hand, in a setting with financial constraints, a reduction in markups is associated with slower capital accumulation, as the rate of self-financed investment falls. Thus, the positive impact of competition on steady-state misallocation is reduced by the presence of financial constraints. Empirically, I test and confirm the qualitative predictions of the model with data on Indian manufacturing. First, I exploit natural variation in the level of competition, arising from the pro-competitive impact of India’s 1997 dereservation reform on incumbent plants. I show that, in line with the model, this reform lead to a reduction in markup levels and markup dispersion, as well as to a slowdown in the firm-level speed of capital convergence. Finally, I corroborate the external validity of the finding that capital convergence slows down with competition by providing evidence for the full panel of manufacturing plants in India’s Annual Survey of Industries, and show that this slowdown is particularly pronounced in sectors with higher levels of financial dependence.
Ethnic divisions have been shown to adversely affect economic performance and political stability, especially in Africa, but the underlying reasons remain contested, with multiple mechanisms potentially playing a role. We utilize lab experiments to isolate the role of one such mechanism—ethnic preferences—which have been central in both theory and in the conventional wisdom about the impact of ethnic differences. We employ an unusually rich research design, collecting multiple rounds of experimental data with a large sample of 1,300 subjects in Nairobi; employing within‐lab priming conditions; and utilizing both standard and novel experimental measures, including implicit association tests. The econometric approach was pre‐specified in a registered pre‐analysis plan. Most of our tests yield no evidence of coethnic bias. The results run strongly against the common presumption of extensive ethnic bias among ordinary Kenyans, and suggest that other mechanisms may be more important in explaining the negative association between ethnic diversity and economic and political outcomes.