Capacity Constrained Exporters: Micro Evidence and Macro Implications

This study challenges a central assumption of standard trade models: constant marginal cost technology. We present evidence consistent with the view that increasing marginal cost is present in the data, and further identify financial and physical capacity constraints as the main sources of increasing marginal cost. To understand and quantify the importance of increasing marginal cost faced by financially and physically constrained exporters, we develop a novel structural estimation framework that incorporates these micro frictions. Our structural estimates suggest that the presence of such capacity constrained firms can (1) reduce aggregate output responses to external demand shocks by 30% and (2) result in welfare loss by around 23%.