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Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments

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  • Svetlana Demidova

    (Department of Economics, McMaster University)

  • Kala Krishna

    (Department of Economics, Pennsylvania State University and NBER)

  • Hiau Looi Kee

    (Development Research Group - Trade, The World Bank)

  • Ivan Cherkashin

    (Department of Economics, Pennsylvania State University)

Abstract

In previous work (Kee and Krishna (2008), "Firm Level Heterogeneous Productivity and Demand Shocks: Evidence from Bangladesh," American Economic Review, 98(2)) we argued that two dimensions of firm heterogeneity (firm specific productivity and firm and market specific demand shocks) were needed to explain the facts. In this paper we do three things. 1. We develop a partial equilibrium model of the Bangladeshi Apparel sector exporting one product group to two markets that incorporates these two dimensions of heterogeneity. 2. We show how to use this model together with information on the distributions of productivity and demand shocks (which we obtain from prior work, see Demidova, Kee and Krishna (2008), "Do Trade Policy Differences Induce Sorting? Theory and Evidence from Bangladeshi Apparel Exporters'') to estimate the model. 3. We use the model to perform counterfactual experiments about the effect of liberal trade preferences (accompanied possibly by distortion Rules of Origin) in one country. The contribution of the work is threefold. First, it simplifies the multi-country general equilibrium heterogeneous firm model to one that can be useful empirically. Second, our estimation procedure identifies fixed costs of entry, exports and production as well as documentation costs associated with meeting Rules of Origin. Such costs in prior work have been hard to estimate. Entry costs have been estimated in dynamic models using panel data from the pattern of firm entry/exit decisions. Our approach provides another way to estimate such costs from cross sectional data using differences in trade policy across destinations to do so. Third, our model can be simulated to provide estimates of the outcomes of alternative trade scenarios.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1199.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1199

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References

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  1. Hiau Looi Kee & Kala Krishna, 2008. "Firm-Level Heterogeneous Productivity and Demand Shocks: Evidence from Bangladesh," American Economic Review, American Economic Association, vol. 98(2), pages 457-62, May.
  2. Pamela Bombarda & Elisa Gamberoni, 2013. "Firm heterogeneity, Rules of Origin and Rules of Cumulation," Post-Print hal-00874949, HAL.
  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. Miklos Koren & Roc Armenter, 2009. "Economies of Scale and the Size of Exporters," 2009 Meeting Papers 1269, Society for Economic Dynamics.
  5. Kala Krishna, 2005. "Understanding Rules of Origin," NBER Working Papers 11150, National Bureau of Economic Research, Inc.
  6. Aaditya Mattoo & Devesh Roy & Arvind Subramanian, 2003. "The Africa Growth and Opportunity Act and its Rules of Origin: Generosity Undermined?," The World Economy, Wiley Blackwell, vol. 26(6), pages 829-851, 06.
  7. Stephen J Redding & Peter K Schott & Andrew B Bernard, 2007. "Multi-product Firms and Trade Liberalization," 2007 Meeting Papers 44, Society for Economic Dynamics.
  8. 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.
  9. Lucia Foster & John C. Haltiwanger & Chad Syverson, 2012. "The Slow Growth of New Plants: Learning about Demand?," NBER Working Papers 17853, National Bureau of Economic Research, Inc.
  10. 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.
  11. repec:nbr:nberwo:13346 is not listed on IDEAS
  12. Demidova, Svetlana & Kee, Hiau Looi & Krishna, Kala, 2012. "Do trade policy differences induce sorting? Theory and evidence from Bangladeshi apparel exporters," Journal of International Economics, Elsevier, vol. 87(2), pages 247-261.
  13. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau.
  14. Irene Brambilla & Amit K. Khandelwal & Peter K. Schott, 2010. "China's Experience under the Multi-Fiber Arrangement (MFA) and the Agreement on Textiles and Clothing (ATC)," NBER Chapters, in: China's Growing Role in World Trade, pages 345-387 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Kala Krishna, 2011. "Limiting Emissions and Trade: Some Basic Ideas," NBER Chapters, in: The Design and Implementation of U.S. Climate Policy, pages 53-61 National Bureau of Economic Research, Inc.
  2. Jaime de Melo & Alberto Portugal-Perez, 2011. "Preferential Market Access Design: Evidence and Lessons from African Apparel Exports to the US and to the EU," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 11091, Institut d'Economie et Econométrie, Université de Genève.
  3. Hillberry, Russell & Hummels, David, 2013. "Trade Elasticity Parameters for a Computable General Equilibrium Model," Handbook of Computable General Equilibrium Modeling, Elsevier.
  4. Bernard, Andrew B. & Jensen, J Bradford & Redding, Stephen J. & Schott, Peter K., 2011. "The Empirics of Firm Heterogeneity and International Trade," CEPR Discussion Papers 8677, C.E.P.R. Discussion Papers.
  5. Demidova, Svetlana & Kee, Hiau Looi & Krishna, Kala, 2012. "Do trade policy differences induce sorting? Theory and evidence from Bangladeshi apparel exporters," Journal of International Economics, Elsevier, vol. 87(2), pages 247-261.
  6. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," NBER Working Papers 18652, National Bureau of Economic Research, Inc.
  7. Beatriz de Blas & Katheryn Niles Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization and Monetary Policy Institute Working Paper 67, Federal Reserve Bank of Dallas.
  8. Egger, Peter & Pfaffermayr, Michael, 2011. "Structural Estimation of Gravity Models with Path-dependent Market Entry," CEPR Discussion Papers 8458, C.E.P.R. Discussion Papers.
  9. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.

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