We exploit the implementation of a rural pension policy in China to estimate the average rural-to-urban migration cost for workers affected by the policy and the average underlying sectoral productivity difference. Our estimates, based on a large panel data set, reveal significant migration costs and substantial sectoral productivity differences, with sorting playing a minor role in accounting for sectoral labor income gaps. We construct and structurally estimate a general equilibrium household model with endogenous labor supply and migration. The results of this model align with the reduced-form findings and illustrate how the rural pension policy influences migration, GDP, and welfare through improving within-household labor allocation. Counterfactual analyses based on the model show that the positive effects of the policy remain even if migration costs were significantly lower, and that scaling up the rural pension policy would lead to even larger improvements in labor allocation, GDP, and welfare.
We provide the first quantitative evaluation of the impacts and interactions of the US-China trade wars and industrial policy competitions. We extend the model in Caliendo and Parro (2015) by incorporating sectoral external economies of scale. We find that (i) under our baseline calibration of scale economies, the “Made-in-China 2025” (“MIC 2025”) subsidies tend to improve the welfare of both China and the U.S.; (ii) the US gains from Trumpian tariffs if China does not retaliate, and the gain is larger if China had implemented the “MIC 2025” project; (iii) in a non-cooperative tariff game targeting on high-tech industries supported by the “MIC 2025”, both China and the U.S. impose high tariffs and endure welfare losses; and (iv) if it is feasible for the U.S. to subsidize its own high-tech industries, the U.S. would reduce its tariffs on high-tech imports from China and benefit from its own industrial subsidies. These results (i) provide a rationale for trade wars and industrial policy competitions between the U.S. and China and (ii) suggest that industrial subsidies, if properly implemented, may generate less distortion than import tariffs as a means of international competition.