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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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 |
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Foreign Institution |
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World Bank Open Knowledge Repository |
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World Bank |
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English |
topic |
PRODUCTIVITY TRADE LIBERALIZATION MISMEASUREMENT INVENTORIES INPUT COST |
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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 |
_version_ |
1764482563898867712 |