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A Theory of Entry and Exit into Exports Markets

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  • Alfonso A. Irarrazabal
  • Luca David Opromolla

Abstract

This paper introduces persistent productivity shocks in a continuous-time mononopolistic competition model of trade with hetererogenous firms similar to Melitz (2003). In our model, the presence of sunk costs and uncertainty have three main consequences: first, firms export decisions become history-dependent. Second, the model generates firm dynamics and allows for substantial heterogeneity in export growth conditional on survival. Policy experiments modify the equilibrium along both the cross-sectional and time dimensions. Third, both the generated equilibrium firm size distribution and sales distribution of exporters into a foreign market are Pareto in the upper tail. All three consequences have been supported by empirical evidence. To solve the model we derive the stationary productivity distributions for exporters and non-exporters in general equilibrium. We point to the presence of a link between intra-industry firm heterogeneity and the degree of persistence in export status. Finally, we perform a numerical exercise to show how per-period fixed cost and up-front entry costs are differently related to persistence in export status for exporters and non-exporters.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200820.

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Date of creation: 2008
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Handle: RePEc:ptu:wpaper:w200820

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  1. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2001. "Market entry costs, producer heterogeneity and export dynamics," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 03-10, Indian Statistical Institute, New Delhi, India.
  2. Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  4. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08.
  5. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
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