The impact of trade on growth and welfare with heterogeneous firms and rent-sharing

Abstract

Can trade liberalization jointly lead to an increase in per capita GDP and higher welfare? To answer this question, we develop a tractable dynamic trade model with heterogeneous firms and rent-sharing. Analytically decomposing the impact of trade liberalization on per capita GDP and welfare into three or four forces, we first show that trade liberalization may lead to a decline in per capita GDP and deteriorate welfare. Our simulation then demonstrates that when rent-sharing effects are strong, a response of welfare to trade liberalization can be U-shaped or inverted U-shaped; giving a possible answer NO to our research question.