Firm Heterogeneity, Export Participation, and Trade Reform
AbstractThis paper evaluates the welfare gains to trade reform in a model of endogenous export participation. Specifically, assuming that firms face an up-front, sunk cost of entering foreign markets and a smaller period-by-period continuation cost, we derive the discrete entry and exit decisions yielding exporter dynamics in an otherwise standard equilibrium open economy model. Lowering tariffs increases export participation by increasing the rate of entry and lowering the rate of exit from foreign markets. In contrast with previous work that does not include sunk costs of exporting or idiosyncratic firm productivity shocks, we find smaller welfare gains. With sunk costs the selection gain in productivity from increased entry of relatively productive firms is offset in part by the prolonged participation of the least productive firms. Consideration of transition dynamics also substantially lowers the welfare gains to trade reform
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 795.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Trade Liberalization; Firm Heterogeneity; Sunk Costs; Welfare;
Find related papers by JEL classification:
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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- Ananth Ramanarayanan, 2007. "International Trade Dynamics with Intermediate Inputs," 2007 Meeting Papers 722, Society for Economic Dynamics.
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