An Agent Based Model of Monopolistic Competition in International Trade with Emerging Firm Heterogeneity

Export firms have better performance than firms that do not export, the so-called exporter premia: exporters are larger, they are relatively more capital and skill intensive, exporters have higher productivity (Bernard et al. 2007a; Bernard et al. 2005). The better performance of exporters may be the result of a self-selection effect: only the most competitive firms are able to enter foreign markets (ex-ante self-selection). On the other hand, exporting may improve firm performance (ex-post effect). Differences between exporters and non-exporters may have a significant impact on aggregate welfare and growth; in particular, disentangling the importance of the ex-ante effect from the ex-post effect may be useful for designing public policies (Bernard & Jensen 1999). The economic approach based on the Melitz (2003) model analyzes the exporter premia using monopolistic competition markets with firm heterogeneity in terms of a given distribution of firm productivity. This paper presents an agent based simulation of a monopolistic competition market in which firm heterogeneity is an emerging pattern of firms' choices and interactions, conceiving productivity growth as the results of firms' individual innovative efforts. The model is able to replicate the better performance of exporters, stressing the importance of decision-making processes and learning capabilities of firms in determining both the ex-ante and the ex-post effects.