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Cost Linkages Transmit Volatility Across Markets

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  • Daniel X. Nguyen

    (Department of Economics, University of Copenhagen)

  • Georg Schaur

    (University of Tennessee)

Abstract

We present and test a model relating a firm's idiosyncratic cost, its exporting status, and the volatilities of its domestic and export sales. In prior models of trade, supply costs for domestic and exports were linear and thus additively separable. We introduce a nonlinear cost function in order to link the domestic and export supply costs. This theoretical contribution has two new implications for the exporting firm. First, the demand volatility in the foreign market now directly affects the firm's domestic sales volatility. Second, firms hedge domestic demand volatility with exports. The model has several testable predictions. First, larger firms have lower total and domestic sales volatilities. Second, foreign market volatility increases domestic sales volatilities for exporters. Third, exporters allocate output across both markets in order to reduce total sales volatility. We find evidence for these predictions with Danish firms operating between 1992 and 2006.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 2010-03.

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Length: 29 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:kud:epruwp:10-03

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Cited by:
  1. Andreas Lichter & Andreas Peichl & Sebastian Siegloch, 2014. "Exporting and Labor Demand: Micro-level Evidence from Germany," CESifo Working Paper Series 4668, CESifo Group Munich.
  2. Ray Chaudhuri, A., 2014. "Acquisitions by Multinationals and Trade Liberalization," Discussion Paper 2014-006, Tilburg University, Center for Economic Research.
  3. Christopher Kurz & Mine Z. Senses, 2013. "Importing, Exporting And Firm-Level Employment Volatility," Working Papers 13-31, Center for Economic Studies, U.S. Census Bureau.
  4. Chan, Rosanna, 2009. "Why liquidity matters to the export decision of the firm," MPRA Paper 27154, University Library of Munich, Germany, revised Aug 2010.
  5. Berman, N. & Berthou, A. & Héricourt, J., 2012. "Export dynamics and sales at home," Working papers 408, Banque de France.
  6. Christopher Kurz & Mine Z. Senses, 2013. "Importing, exporting and firm-level employment volatility," Finance and Economics Discussion Series 2013-44, Board of Governors of the Federal Reserve System (U.S.).
  7. JaeBin Ahn & Alexander McQuoid, 2013. "Capacity Constrained Exporters: Micro Evidence and Macro Implications," Working Papers 1301, Florida International University, Department of Economics.

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