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How do firms adjust when trade stops?

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  • Lastauskas, Povilas
  • Proškutė, Aurelija
  • Žaldokas, Alminas

Abstract

We investigate how firms adjust to the introduction of sudden, unanticipated, and eventually long-lasting economic sanctions. In 2014, Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by full-time employment. Investment reacts immediately but also additionally in the later periods if part-time employment adjustments that proxy for the firm's exposure to the permanence of the shock are large. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

Suggested Citation

  • Lastauskas, Povilas & Proškutė, Aurelija & Žaldokas, Alminas, 2023. "How do firms adjust when trade stops?," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 287-307.
    • Handle: RePEc:eee:jeborg:v:216:y:2023:i:c:p:287-307
    DOI: 10.1016/j.jebo.2023.09.004
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    More about this item

    Keywords

    Economic sanctions; Firm adjustment margins; Part-time employment; New export markets;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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