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How Do Firms Adjust When Trade Stops?

Author

Listed:
  • Povilas Lastauskas

    (Queen Mary University of London)

  • Aurelija Proskute

    (Bank of Lithuania and Vilnius University)

  • Alminas Zaldokas

    (Hong Kong University of Science and Technology)

Abstract

We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. In 2014, Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

Suggested Citation

  • Povilas Lastauskas & Aurelija Proskute & Alminas Zaldokas, 2023. "How Do Firms Adjust When Trade Stops?," Bank of Lithuania Working Paper Series 114, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:114
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    More about this item

    Keywords

    economic sanctions; firm adjustment margins; part-time employment; new export markets;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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