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Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization

  • George Alessandria
  • Horag Choi

The authors study a variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. They calibrate the model to match the employment size distribution of US manufacturing establishments. Export participation in the calibrated model is then compared to the data on US manufacturing exporters. With fixed costs of starting to export about 3.9 times as large as costs of continuing as an exporter, the model can match both the size distribution of exporters and transition into and out of exporting. The calibrated model is then used to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade. Contrary to the view that the gains to lowering tariffs are larger in models with export decisions, they find that steady state consumption increases by less in their benchmark model of exporting than in a similar model without fixed costs. However, they also find that comparisons of steady state consumption understate the welfare gains to trade reform in models with fixed costs and overstate the welfare gains in models without fixed costs. With fixed costs, tariffs lead to an overaccumulation of product varieties which can be used more effectively along the transition to the new steady state. Thus, following trade liberalizations economic activity overshoots its steady state, with the peak in output coming 10 years after the trade reform. Finally, the authors explore the impact of the key modelling assumptions in the theoretical literature for quantitative results.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-17.

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Date of creation: 2007
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Handle: RePEc:fip:fedpwp:07-17
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  1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  2. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2008. "Inventories, lumpy trade, and large devaluations," Working Paper Series WP-08-07, Federal Reserve Bank of Chicago.
  3. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  4. Baldwin, Richard & Robert-Nicoud, Frédéric, 2005. "Trade and Growth with Heterogeneous Firms," CEPR Discussion Papers 4965, C.E.P.R. Discussion Papers.
  5. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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  8. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics 599, Boston College Department of Economics.
  9. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  10. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May.
  11. George Alessandria & Horag Choi, 2005. "Do sunk costs of exporting matter for net export dynamics?," Working Papers 05-20, Federal Reserve Bank of Philadelphia.
  12. Jonathan Eaton & Marcela Eslava & Maurice Kugler & James Tybout, 2007. "Export Dynamics in Colombia: Firm-Level Evidence," NBER Working Papers 13531, National Bureau of Economic Research, Inc.
  13. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc.
  14. George Alessandria & Horag Choi, 2007. "Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization," Working Papers 07-17, Federal Reserve Bank of Philadelphia.
  15. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, 06.
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  28. repec:rus:hseeco:122439 is not listed on IDEAS
  29. Jhonatan Eaton & Marcela Eslava & Maurice Kugler & James Tybout, . "Export Growth in Colombia: Firm-Level Evidence," Borradores de Economia 446, Banco de la Republica de Colombia.
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