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Firm Heterogeneity, Export Participation, and Trade Reform

  • George Alessandria


    (Research Department Federal Reserve Bank of Philadelphia)

  • Horag Choi

This paper evaluates the welfare gains to trade reform in a model of endogenous export participation. Specifically, assuming that firms face an up-front, sunk cost of entering foreign markets and a smaller period-by-period continuation cost, we derive the discrete entry and exit decisions yielding exporter dynamics in an otherwise standard equilibrium open economy model. Lowering tariffs increases export participation by increasing the rate of entry and lowering the rate of exit from foreign markets. In contrast with previous work that does not include sunk costs of exporting or idiosyncratic firm productivity shocks, we find smaller welfare gains. With sunk costs the selection gain in productivity from increased entry of relatively productive firms is offset in part by the prolonged participation of the least productive firms. Consideration of transition dynamics also substantially lowers the welfare gains to trade reform

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 795.

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Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:795
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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