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Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments

  • Ivan Cherkashin
  • Svetlana Demidova
  • Hiau Looi Kee
  • Kala Krishna

This paper builds a tractable partial equilibrium model in the spirit of Melitz (2003), which incorporates two dimensions of heterogeneity: firms specific productivity shocks and firm-market specific demand shocks. The structural parameters of interest are estimated using only cross-sectional data, and counterfactual experiments regarding the effects of reducing costs, both fixed and marginal, or of trade preferences (with distortionary Rules of Origin) offered by an importing country are performed. Our counterfactuals make a case for "trade as aid" as such policies can create a ""win-win-win" scenario and are less subject to the usual worries regarding the efficacy of direct foreign aid. They also suggest that reducing fixed costs at various levels can be quite effective as export promotion devices, with the exports induced per dollar spent ranging from .4 to 25.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16557.

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Date of creation: Nov 2010
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Publication status: published as Cherkashin, Ivan & Demidova, Svetlana & Kee, Hiau Looi & Krishna, Kala, 2015. "Firm heterogeneity and costly trade: A new estimation strategy and policy experiments," Journal of International Economics, Elsevier, vol. 96(1), pages 18-36.
Handle: RePEc:nbr:nberwo:16557
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