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Firm Heterogeneity and Country Size Dependent Market Entry Cost

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  • Åkerman, Anders

    ()
    (Research Institute of Industrial Economics (IFN))

  • Forslid, Rikard

    ()
    (Stockholm University)

Abstract

This paper introduces a market size dependent firm entry cost into the Melitz (2003) model. This is a relatively small generalisation, which preserves the analytical solvability of the model. Nevertheless, our model yields several new results that are in line with data. First, the average productivity of firms located in a market increases in the size of the market. Second, the productivity of exporters is U-shaped with reference to export market size. Third, the productivity premium (the difference in average productivity) between exporters and non-exporters decreases in the home country size. Fourth, we derive a set of new results related to trade volume. It is shown that when the fixed entry cost of exporting declines, for instance as the result of economic integration, export shares converge. This prognosis is supported by the empirical section of the paper. Fifth, we use a multicountry version of our model to derive a gravity equation. Our specification yields a gravity equation à la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 790.

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Length: 27 pages
Date of creation: 23 Feb 2009
Date of revision:
Handle: RePEc:hhs:iuiwop:0790

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Keywords: Heterogenous Firms; Market Size; Beachhead Costs;

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References

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Cited by:
  1. Michele Imbruno, 2014. "Trade Liberalization, Intermediate Inputs and Firm Efficiency: Direct versus Indirect Modes of Import," Discussion Papers 2014-02, University of Nottingham, GEP.

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