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Firm Heterogeneity and Country Size Dependent Market Entry Costs

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Author Info
Anders Akerman
Rikard Forslid

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Abstract

This paper introduces a market size dependent firm entry cost into the Helpman, Melitz and Yeaple (2004) (HMY) version of 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 a la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd09-056.

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Date of creation: Apr 2009
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Handle: RePEc:hst:ghsdps:gd09-056

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Related research
Keywords: heterogenous firms; market size; market entry costs;

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration

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  19. Schank, Thorsten & Schnabel, Claus & Wagner, Joachim, 2007. "Do exporters really pay higher wages? First evidence from German linked employer-employee data," Journal of International Economics, Elsevier, vol. 72(1), pages 52-74, May. [Downloadable!] (restricted)
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  20. Sofronis K. Clerides & Saul Lach & James R. Tybout, 1998. "Is Learning By Exporting Important? Micro-Dynamic Evidence From Colombia, Mexico, And Morocco," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 903-947, August. [Downloadable!] (restricted)
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