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Product Switching in a Model of Learning

  • Olga A. Timoshenko

    ()

    (Department of Economics/Institute for International Economic Policy, George Washington University)

New exporters add and drop products with much greater frequency than old exporters. This paper rationalizes this behavior with a model of demand learning in which an exporters profitability on the demand side is determined by a time-invariant firmdestination appeal index, and transient firm-destination-year preference shocks. New exporters must learn about their appeal indices in the presence of these shocks, and respond to fluctuations in demand by adding and dropping products more frequently than older exporters because they have less information about their attractiveness to consumers. Calibrated to match cross-section distribution of sales and scope, the model quantitatively accounts for the contribution of the extensive margins to aggregate Brazilian exports. The model predicts that in response to a decline in trade costs, existing exporters add new products and new exporters enter a destination. Counterfactual implies that the contribution of product adding to export growth resulting from trade liberalization is three times larger than the contribution of exporter entry.

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File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Timoshenko_IIEPWP2012-10.pdf
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Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2012-10.

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Length: 39 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:gwi:wpaper:2012-10
Contact details of provider: Web page: http://www.gwu.edu/~iiep/
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