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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Svetlana Demidova & Kala Krishna & Hiau Looi Kee & Ivan Cherkashin, 2009. "Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments," 2009 Meeting Papers 1199, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:1199
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fabrice Defever & Alejandro Riaño, 2016. "Protectionism through Exporting: Subsidies with Export Share Requirements in China," Discussion Papers 2016-03, University of Nottingham, GEP.
    2. 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.
    3. d'Artis Kancs, 2010. "Structural Estimation of Variety Gains from Trade Integration in Asia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 43(3), pages 270-288.
    4. Bernard, Andrew B. & Jensen, J Bradford & Redding, Stephen J. & Schott, Peter K., 2016. "Global Firms," CEPR Discussion Papers 11555, C.E.P.R. Discussion Papers.
    5. Kazunobu HAYAKAWA & Nuttawut LAKSANAPANYAKUL & Shujiro URATA, 2015. "Firm-level Impact of Free Trade Agreements on Import Prices," Working Papers DP-2015-33, Economic Research Institute for ASEAN and East Asia (ERIA).
    6. Kee, Hiau Looi, 2015. "Local intermediate inputs and the shared supplier spillovers of foreign direct investment," Journal of Development Economics, Elsevier, vol. 112(C), pages 56-71.
    7. HAYAKAWA Kazunobu & URATA Shujiro & YOSHIMI Taiyo, 2017. "Choosing Between Multiple Preferential Tariff Schemes: Evidence from Japan's imports," Discussion papers 17002, Research Institute of Economy, Trade and Industry (RIETI).
    8. Fabrice Defever & Alejandro Riano, 2017. "Twin peaks," Discussion Papers 2017-15, University of Nottingham, GEP.
    9. Kazunobu Hayakawa & Nuttawut Laksanapanyakul & Shujiro Urata, 2016. "Measuring the costs of FTA utilization: evidence from transaction-level import data of Thailand," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(3), pages 559-575, August.
    10. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, Elsevier.
    11. Jaime de Melo & Alberto Portugal-Perez, 2011. "Preferential Market Access Design: Evidence and Lessons from African Apparel Exports to the US and to the EU," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 11091, Institut d'Economie et Econométrie, Université de Genève.
    12. Peter Egger & Michael Pfaffermayr, 2011. "Structural Estimation of Gravity Models with Path-Dependent Market Entry," FIW Research Reports series III-007, FIW.
    13. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2012. "The Empirics of Firm Heterogeneity and International Trade," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 283-313, July.
    14. Hayakawa, Kazunobu & Kim, Han-Sung & Yoshimi, Taiyo, 2017. "Exchange rate and utilization of free trade agreements: Focus on rules of origin," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 93-108.
    15. Kala Krishna, 2011. "Limiting Emissions and Trade: Some Basic Ideas," NBER Chapters,in: The Design and Implementation of U.S. Climate Policy, pages 53-61 National Bureau of Economic Research, Inc.
    16. Hayakawa, Kazunobu & Nuttawut, Laksanapanyakul & Yoshimi, Taiyo, 2018. "Tariff scheme choice," IDE Discussion Papers 684, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    17. Hayakawa, Kazunobu & Kimura, Fukunari & Laksanapanyakul, Nuttawut, 2016. "Firm-level trade creation and diversion of regional trade agreements in Thailand," IDE Discussion Papers 621, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    18. Kazunobu Hayakawa & Nuttawut Laksanapanyakul & Hiroshi Mukunoki & Shujiro Urata, 2016. "Impact of Free Trade Agreement Utilisation on Import Prices," Working Papers DP-2016-24, Economic Research Institute for ASEAN and East Asia (ERIA).
    19. Hillberry, Russell & Hummels, David, 2013. "Trade Elasticity Parameters for a Computable General Equilibrium Model," Handbook of Computable General Equilibrium Modeling, Elsevier.
    20. Beatriz de Blas & Katheryn N. Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization and Monetary Policy Institute Working Paper 67, Federal Reserve Bank of Dallas.
    21. Hayakawa, Kazunobu & Laksanapanyakul, Nuttawut & Yoshimi, Taiyo, 2016. "Firm-level utilization rates of regional trade agreements : importers' perspective," IDE Discussion Papers 615, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    22. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.
    23. Hayakawa, Kazunobu & Yoshimi, Taiyo, 2016. "Gravity with multiple tariff schemes," IDE Discussion Papers 614, Institute of Developing Economies, Japan External Trade Organization(JETRO).

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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