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Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization

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Author Info
George Alessandria
Horag Choi

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Abstract

The authors study a variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. They calibrate the model to match the employment size distribution of US manufacturing establishments. Export participation in the calibrated model is then compared to the data on US manufacturing exporters. With fixed costs of starting to export about 3.9 times as large as costs of continuing as an exporter, the model can match both the size distribution of exporters and transition into and out of exporting. The calibrated model is then used to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade. Contrary to the view that the gains to lowering tariffs are larger in models with export decisions, they find that steady state consumption increases by less in their benchmark model of exporting than in a similar model without fixed costs. However, they also find that comparisons of steady state consumption understate the welfare gains to trade reform in models with fixed costs and overstate the welfare gains in models without fixed costs. With fixed costs, tariffs lead to an overaccumulation of product varieties which can be used more effectively along the transition to the new steady state. Thus, following trade liberalizations economic activity overshoots its steady state, with the peak in output coming 10 years after the trade reform. Finally, the authors explore the impact of the key modelling assumptions in the theoretical literature for quantitative results.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-17.

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Date of creation: 2007
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Handle: RePEc:fip:fedpwp:07-17

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Related research
Keywords: Trade ; Tariff ; Exports;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  2. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November. [Downloadable!] (restricted)
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  3. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, MIT Press, vol. 122(1), pages 289-336, 02. [Downloadable!] (restricted)
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  4. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November. [Downloadable!] (restricted)
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  5. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February. [Downloadable!] (restricted)
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  7. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May. [Downloadable!] (restricted)
  8. John Baldwin & Timothy Dunne & John Haltiwanger, 1994. "A Comparison of Job Creation and Job Destruction in Canada and the United States," NBER Working Papers 4726, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 865-915, August.
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  10. Richard E. Baldwin & Rikard Forslid, 2006. "Trade Liberalization with Heterogenous Firms," NBER Working Papers 12192, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05. [Downloadable!] (restricted)
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  12. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May. [Downloadable!] (restricted)
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  13. Baldwin, Richard & Robert-Nicoud, Frédéric, 2006. "Trade and Growth with Heterogenous Firms," CEPR Discussion Papers 5563, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, firm dynamics, and international trade," NBER Working Papers 13326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
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  17. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February. [Downloadable!] (restricted)
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  18. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, January.
  19. repec:rus:hseeco:122439 is not listed on IDEAS
  20. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2008. "Inventories, lumpy trade, and large devaluations," Working Paper Series WP-08-07, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  2. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, Firm Dynamics, and International Trade," Levine's Working Paper Archive 122247000000001423, David K. Levine. [Downloadable!]
    Other versions:
  3. Kei-Mu Yi, 2008. "Can multi-stage production explain the home bias in trade?," Working Papers 08-12, Federal Reserve Bank of Philadelphia. [Downloadable!]
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