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Uncertainty and entry into export markets

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Author Info
Rubén Segura-Cayuela () (Banco de España)
Josep M. Vilarrubia () (Banco de España)

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Abstract

We face uncertainty in most economic decisions we take. This is particularly true in the case of a firm entering a foreign market where there is uncertainty about the size of the market, the distribution channels, the adequacy of the firm's product to local tastes, etc. Despite its obvious importance, this ingredient appears to have been largely overlooked by the literature explaining the direction and volume of international trade flows. We incorporate this informational uncertainty into a model with heterogeneous firms similar to the one proposed by Melitz (2003). The model exhibits informational externalities that arise via informational complementarities: in markets with less uncertainty, the most productive firms always find optimal to enter. Once a firm enters that foreign market, her success/failure reveals information to other domestic firms who, given the new information, optimally decide whether to enter. We characterize the conditions under which, given initial entry, informational externalities are strong enough to reach an equilibrium with full information. The model delivers an explanation for the recent dynamic evolution of trade flows, at the intensive margin at the country level and the extensive margin at the firm/product level. The model also provides insights on the persistence of bilateral trade flows, zero trade flows, and why we observe empirically less entrance by small firms than the Melitz model predicts.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0811e.pdf
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0811.

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Length: 37 pages
Date of creation: Jun 2008
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Handle: RePEc:bde:wpaper:0811

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Related research
Keywords: firm heterogeneity; International Trade; Uncertainty; Informational Externalities;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rubén Segura-Cayuela & Josep M. Vilarrubia, 2008. "The effect of foreign service on trade volumes and trade partners," Banco de España Working Papers 0808, Banco de España. [Downloadable!]
  2. Buono, Ines & Fadinger, Harald & Berger, Stefan, 2008. "The Micro Dynamics of Exporting: Evidence from French Firms," MPRA Paper 12940, University Library of Munich, Germany. [Downloadable!]
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