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Market Penetration Costs and Trade Dynamics

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  • Costas Arkolakis

    (Yale University)

Abstract

I introduce trade dynamics into a static model of international trade with product differentiation, heterogeneous productivity firms, and increasing marginal market penetration costs. I interpret firms as ideas that materialize into production, where an idea is a way to produce a differentiated good with a given productivity. Adapting a stochastic process similar to Reed, the model endogenously generates a right tail cross-sectional Pareto distribution of firms’ productivities based on two minimal assumptions: continuous entry of ideas at a certain rate and productivities of ideas that evolve according to a geometric Brownian motion. The cross-sectional predictions of the model for the distribution of domestic and exporting sales of firms are in line with firm-level data. In addition, the model delivers new predictions consistent with panel data observations on domestic and exporting firm-level sales. It predicts that many small firms enter and exit the market very frequently and that the growth rate as well as the variance of the growth rate of sales is higher for small firms.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 548.

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Date of creation: 2008
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Handle: RePEc:red:sed008:548

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Cited by:
  1. Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper 55, Federal Reserve Bank of Dallas.
  2. Gianmarco I.P. Ottaviano & Gregory Corcos & Massimo Del Gatto & Giordano Mion, 2009. "Productivity and Firm Selection: Quantifying the “New” Gains from Trade," Working Papers 2009.115, Fondazione Eni Enrico Mattei.
  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. Xavier Gabaix, 2008. "Power Laws in Economics and Finance," NBER Working Papers 14299, National Bureau of Economic Research, Inc.
  5. Besedes, Tibor & Prusa, Thomas J., 2011. "The role of extensive and intensive margins and export growth," Journal of Development Economics, Elsevier, vol. 96(2), pages 371-379, November.
  6. Tomás Castagnino, 2011. "What Drives firms´ Geographic Diversification in International Markets?," BCRA Working Paper Series 201152, Central Bank of Argentina, Economic Research Department.
  7. Hallak, Juan Carlos & Sivadasan, Jagadeesh, 2008. "Productivity, quality and exporting behavior under minimum quality constraints," MPRA Paper 24146, University Library of Munich, Germany.
  8. Alfonso A. Irarrazabal & Luca David Opromolla, 2009. "The Cross Sectional Dynamics of Heterogenous Trade Models," Working Papers w200924, Banco de Portugal, Economics and Research Department.

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