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International Trade and the Firm Size Distribution

Author

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  • Facundo Piguillem

    (EIEF. Einaudi Institute for Economics and Finance)

  • Loris Rubini

    (Universidad Carlos III de Madrid)

Abstract

This paper studies the differences in firm size distributions between European countries. We start by documenting large differences using the EFIGE database: in the countries under most severe distress in the sample (Italy and Spain) firms are relatively small compared with the remaining countries. To account for this, we develop a multi-country, continuous time version of Melitz (2003) with endogenous process innovation. Firms choose when to become exporters by paying a sunk export cost. This gives them access to a larger market, increases profits and provides incentives to grow faster. We analytically derive both an endogenous steady state Pareto size distribution of firms and the transitional distribution between steady states. The model allows us to identify the main source of the distribution's difference: export costs. This sharply contrasts the predictions of a closed economy model, where heterogeneous innovation costs account for the difference. Additionally we identify strong microeconomic similarities among countries that at first appear different, such as Spain and U.K., and strong microeconomic differences between countries that appear similar, such as Austria and Germany. International trade is essential to uncover these patterns.

Suggested Citation

  • Facundo Piguillem & Loris Rubini, 2012. "International Trade and the Firm Size Distribution," 2012 Meeting Papers 857, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:857
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    References listed on IDEAS

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    1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    2. di Giovanni, Julian & Levchenko, Andrei A. & Rancière, Romain, 2011. "Power laws in firm size and openness to trade: Measurement and implications," Journal of International Economics, Elsevier, vol. 85(1), pages 42-52, September.
    3. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    4. David Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    5. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    6. Rubini, Loris, 2009. "Innovation and the Elasticity of Trade Volumes to Tariff Reductions," MPRA Paper 21484, University Library of Munich, Germany.
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    Cited by:

    1. Allub, Lian, 2015. "Asymmetric effects of trade and FDI: South America versus Europe," Economics Working Papers MWP2015/16, European University Institute.

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