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

Listed author(s):
  • Svetlana Demidova

    (Department of Economics, McMaster University)

  • Kala Krishna

    (Department of Economics, Pennsylvania State University and NBER)

  • Hiau Looi Kee

    (Development Research Group - Trade, The World Bank)

  • Ivan Cherkashin

    (Department of Economics, Pennsylvania State University)

In previous work (Kee and Krishna (2008), "Firm Level Heterogeneous Productivity and Demand Shocks: Evidence from Bangladesh," American Economic Review, 98(2)) we argued that two dimensions of firm heterogeneity (firm specific productivity and firm and market specific demand shocks) were needed to explain the facts. In this paper we do three things. 1. We develop a partial equilibrium model of the Bangladeshi Apparel sector exporting one product group to two markets that incorporates these two dimensions of heterogeneity. 2. We show how to use this model together with information on the distributions of productivity and demand shocks (which we obtain from prior work, see Demidova, Kee and Krishna (2008), "Do Trade Policy Differences Induce Sorting? Theory and Evidence from Bangladeshi Apparel Exporters'') to estimate the model. 3. We use the model to perform counterfactual experiments about the effect of liberal trade preferences (accompanied possibly by distortion Rules of Origin) in one country. The contribution of the work is threefold. First, it simplifies the multi-country general equilibrium heterogeneous firm model to one that can be useful empirically. Second, our estimation procedure identifies fixed costs of entry, exports and production as well as documentation costs associated with meeting Rules of Origin. Such costs in prior work have been hard to estimate. Entry costs have been estimated in dynamic models using panel data from the pattern of firm entry/exit decisions. Our approach provides another way to estimate such costs from cross sectional data using differences in trade policy across destinations to do so. Third, our model can be simulated to provide estimates of the outcomes of alternative trade scenarios.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1199.

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Date of creation: 2009
Handle: RePEc:red:sed009:1199
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Irene Brambilla & Amit Khandelwal & Peter Schott, 2007. "China's Experience Under the Multifiber Arrangement (MFA) and the Agreement on Textiles and Clothing (ATC)," NBER Working Papers 13346, National Bureau of Economic Research, Inc.
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  5. Pamela Bombarda & Elisa Gamberoni, 2008. "Firm Heterogeneity, Rules of Origin and Rules of Cumulation," IHEID Working Papers 09-2008, Economics Section, The Graduate Institute of International Studies.
  6. Blum, Bernardo S. & Claro, Sebastian & Horstmann, Ignatius J., 2013. "Occasional and perennial exporters," Journal of International Economics, Elsevier, vol. 90(1), pages 65-74.
  7. Roc Armenter & Miklos Koren, 2009. "Economies of scale and the size of exporters," Working Papers 09-15, Federal Reserve Bank of Philadelphia.
  8. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588.
  9. William F. Lincoln & Andrew H. McCallum, 2011. "Entry Costs and Increasing Trade," Working Papers 11-38r, Center for Economic Studies, U.S. Census Bureau.
  10. Mark J. Roberts & Daniel Yi Xu & Xiaoyan Fan & Shengxing Zhang, 2012. "The Role of Firm Factors in Demand, Cost, and Export Market Selection for Chinese Footwear Producers," NBER Working Papers 17725, National Bureau of Economic Research, Inc.
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  12. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
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  21. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2006. "Multi-product firms and trade liberalization," LSE Research Online Documents on Economics 3684, London School of Economics and Political Science, LSE Library.
  22. William F. Lincoln & Andrew H. McCallum, 2011. "Entry Costs & Increasing Trade," William Davidson Institute Working Papers Series wp1024, William Davidson Institute at the University of Michigan.
  23. Timothy J. Kehoe & Kim J. Ruhl, 2009. "How important is the new goods margin in international trade?," Staff Report 324, Federal Reserve Bank of Minneapolis.
  24. Demidova, Svetlana & Kee, Hiau Looi & Krishna, Kala, 2012. "Do trade policy differences induce sorting? Theory and evidence from Bangladeshi apparel exporters," Journal of International Economics, Elsevier, vol. 87(2), pages 247-261.
  25. Debaere, Peter & Mostashari, Shalah, 2010. "Do tariffs matter for the extensive margin of international trade? An empirical analysis," Journal of International Economics, Elsevier, vol. 81(2), pages 163-169, July.
  26. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau.
  27. Kala Krishna, 2005. "Understanding Rules of Origin," NBER Working Papers 11150, National Bureau of Economic Research, Inc.
  28. Alla Lileeva & Daniel Trefler, 2007. "Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants," NBER Working Papers 13297, National Bureau of Economic Research, Inc.
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  34. repec:cen:wpaper:11-38 is not listed on IDEAS
  35. Hiau Looi Kee & Kala Krishna, 2008. "Firm-Level Heterogeneous Productivity and Demand Shocks: Evidence from Bangladesh," American Economic Review, American Economic Association, vol. 98(2), pages 457-462, May.
  36. Alla Lileeva & Daniel Trefler, 2010. "Improved Access to Foreign Markets Raises Plant-level Productivity…For Some Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1051-1099.
  37. Andreas Moxnes, 2010. "Are sunk costs in exporting country specific?," Canadian Journal of Economics, Canadian Economics Association, vol. 43(2), pages 467-493, May.
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