Relationship-Specific Sunk Costs and Exporter Decisions

Using macro-level trade data, we investigate how different types of sunk costs influence decisions of exporters. We make a distinction between the relationship-specific sunk costs that depend on the interactions between the exporter and the importer and sunk costs that do not. We find that exporters’ decisions reflect sensibly their desire to minimize those sunk relationship-specific costs. Specifically, exporters of differentiated products are more likely to reenter the export market than exporters of homogenous products. Also, the former are more likely to stay in the export market and exhibit more stability when doing so than the later. All of our findings are consistent with the view that relationship with their foreign partners matters more for trade in differentiated products than in homogenous ones.