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Multi-product firms and trade liberalization

  • Andrew B. Bernard
  • Stephen Redding
  • Peter K. Schott

This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during trade liberalization. Firm productivity in a given product is modeled as a combination of firm-level “ability” and firmproduct- level “expertise”, both of which are stochastic and unknown prior to the firm’s payment of a sunk cost of entry. Higher firm-level ability raises a firm’s productivity across all products, which induces a positive correlation between a firm’s intensive (output per product) and extensive (number of products) margins. Trade liberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shed marginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce a smaller range of products after liberalization, they increase the share of products sold abroad as well as exports per product. All of these adjustments are shown to be relatively more pronounced in countries’ comparative advantage industries.

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File URL: http://eprints.lse.ac.uk/3684/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 3684.

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Length: 55 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:ehl:lserod:3684
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