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Hedging Trade-Cost Uncertainty

Author

Listed:
  • Hartmut Egger
  • Peter Egger
  • Katharina Erhardt
  • Leandro Navarro

Abstract

This paper studies how international firms hedge against trade-cost uncertainty. We analyze two margins of adjustment: foreign market entry (exporting versus foreign investment) and invoicing in free-on-board (FOB) or cost-insurance-freight-inclusive (CIF) prices. Under oligopolistic competition and price rigidity, trade-cost volatility jointly shapes entry and invoicing choices. Firms with small market shares prefer exporting and FOB-price invoicing, while firms with large market shares favor foreign investment and CIF-price invoicing. Using a novel measure of trade-cost volatility constructed from French customs data, we provide empirical support for these mechanisms and document the joint determination of entry and invoicing decisions. Counterfactual analyses based on the structurally estimated and calibrated model indicate that trade-cost uncertainty has sizable effects on these decisions.

Suggested Citation

  • Hartmut Egger & Peter Egger & Katharina Erhardt & Leandro Navarro, 2026. "Hedging Trade-Cost Uncertainty," CESifo Working Paper Series 13009, CESifo.
    • Handle: RePEc:ces:ceswps:_13009
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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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