Inventories, Input Costs, and Productivity Gains from Trade Liberalizations

Sourcing internationally entails additional costs due to larger per inventory holdings. When firms switch toward foreign sources, these unobserved costs increase. This paper revisits the effect of trade liberalization on firms’ productivity taking...

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Main Authors: Khan, Shafaat Yar, Khederlarian, Armen
Format: Working Paper
Language:English
Published: World Bank, Washington, DC 2021
Subjects:
Online Access:http://documents.worldbank.org/curated/en/157191614780662715/Inventories-Input-Costs-and-Productivity-Gains-from-Trade-Liberalizations
http://hdl.handle.net/10986/35213
id okr-10986-35213
recordtype oai_dc
spelling okr-10986-352132022-09-20T00:09:37Z Inventories, Input Costs, and Productivity Gains from Trade Liberalizations Khan, Shafaat Yar Khederlarian, Armen PRODUCTIVITY TRADE LIBERALIZATION MISMEASUREMENT INVENTORIES INPUT COST Sourcing internationally entails additional costs due to larger per inventory holdings. When firms switch toward foreign sources, these unobserved costs increase. This paper revisits the effect of trade liberalization on firms’ productivity taking into account the inventory premium of importing and input cost heterogeneity. Through model simulations, the paper shows that in the presence of inventory holding costs, their omission in revenue-based productivity measures leads to a systematic overestimation of the elasticity of productivity to input tariffs. Controlling for the firm’s import intensity and inventory usage in the estimation of productivity corrects for the bias. The paper studies the relevance of this potential bias during India’s trade liberalization in the early 1990s. First, it documents that inventory holdings of intermediate goods increased significantly with import intensity and input tariffs. Second, it extends a standard productivity estimation procedure with a control function of the various firm-level input costs. The mismeasurement channel accounts for around 35 percent of the estimated productivity gains. Consistent with the gradual adjustment to the tariff reductions, the bias in the response of firm-level productivity is backloaded. 2021-03-04T14:59:02Z 2021-03-04T14:59:02Z 2021-03 Working Paper http://documents.worldbank.org/curated/en/157191614780662715/Inventories-Input-Costs-and-Productivity-Gains-from-Trade-Liberalizations http://hdl.handle.net/10986/35213 English Policy Research Working Paper;No. 9564 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper South Asia India
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic PRODUCTIVITY
TRADE LIBERALIZATION
MISMEASUREMENT
INVENTORIES
INPUT COST
spellingShingle PRODUCTIVITY
TRADE LIBERALIZATION
MISMEASUREMENT
INVENTORIES
INPUT COST
Khan, Shafaat Yar
Khederlarian, Armen
Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
geographic_facet South Asia
India
relation Policy Research Working Paper;No. 9564
description Sourcing internationally entails additional costs due to larger per inventory holdings. When firms switch toward foreign sources, these unobserved costs increase. This paper revisits the effect of trade liberalization on firms’ productivity taking into account the inventory premium of importing and input cost heterogeneity. Through model simulations, the paper shows that in the presence of inventory holding costs, their omission in revenue-based productivity measures leads to a systematic overestimation of the elasticity of productivity to input tariffs. Controlling for the firm’s import intensity and inventory usage in the estimation of productivity corrects for the bias. The paper studies the relevance of this potential bias during India’s trade liberalization in the early 1990s. First, it documents that inventory holdings of intermediate goods increased significantly with import intensity and input tariffs. Second, it extends a standard productivity estimation procedure with a control function of the various firm-level input costs. The mismeasurement channel accounts for around 35 percent of the estimated productivity gains. Consistent with the gradual adjustment to the tariff reductions, the bias in the response of firm-level productivity is backloaded.
format Working Paper
author Khan, Shafaat Yar
Khederlarian, Armen
author_facet Khan, Shafaat Yar
Khederlarian, Armen
author_sort Khan, Shafaat Yar
title Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
title_short Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
title_full Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
title_fullStr Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
title_full_unstemmed Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
title_sort inventories, input costs, and productivity gains from trade liberalizations
publisher World Bank, Washington, DC
publishDate 2021
url http://documents.worldbank.org/curated/en/157191614780662715/Inventories-Input-Costs-and-Productivity-Gains-from-Trade-Liberalizations
http://hdl.handle.net/10986/35213
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