| Abstract: |
We examine the effects of international trade in the presence of a set of domestic distortions giving rise to informality, a prevalent phenomenon in developing countries. In our quantitative model, the informal sector arises from burdensome taxes and regulations that are imperfectly enforced by the government. Consequently, smaller, less productive firms face fewer distortions than larger, more productive ones, potentially leading to substantial misallocation. We show that in settings with a large informal sector, the gains from trade are significantly amplified, as reductions in trade barriers imply a reallocation of resources from initially less distorted to more distorted firms. We confirm findings from earlier reduced-form studies that the informal sector mitigates the impact of negative labor demand shocks on unemployment. Nonetheless, the informal sector can exacerbate the adverse welfare effects of economic downturns, amplifying misallocation. Last, our research sheds light on the relationship between trade openness and cross-firm wage inequality.
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Biography:
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Rafael Dix-Carneiro is a Professor of Economics at Duke University where he teaches International Trade. His research work focuses on the labor market adjustment process triggered by changes in the global economic environment, such as trade liberalization episodes and the emergence of China as a major global manufacturing power. His research has been published in Econometrica, the American Economic Review, the Quarterly Journal of Economics, among other journals. He received his PhD from Princeton University.
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