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Demand Uncertainty, Selection, and Trade

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Abstract

This paper examines the role of uncertainty on elasticities of trade flows with respect to variable trade costs in a canonical model of trade with monopolistic competition and heterogeneous firms. We identify two channels through which uncertainty impacts trade: through export participation thresholds (the selection effect) and the distribution of shocks governing export selection (the dispersion effect). While the selection effect dampens trade elasticities under uncertainty, the dispersion effect is ambiguous. We develop a methodology for using customs firm-level data to quantify trade elasticities under uncertainty, and the magnitude of each of the two channels through which uncertainty impacts trade. We find that uncertainty amplifies trade elasticities, on average, indicating that the dispersion effect of idiosyncratic firm-level shocks dominates -- though the effect is heterogeneous across industries. The overall magnitude of the endogenous selection mechanism on trade elasticities is small, indicating that the main drivers of trade in this class of trade models are overwhelmingly incumbent firms.

Suggested Citation

  • Erick Sager & Olga A. Timoshenko, 2024. "Demand Uncertainty, Selection, and Trade," Finance and Economics Discussion Series 2024-042, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-42
    DOI: 10.17016/FEDS.2024.042
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    References listed on IDEAS

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    1. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, September.
    2. repec:hal:spmain:info:hdl:2441/nki2gcedn93280ns6fslbhdnm is not listed on IDEAS
    3. Nigai, Sergey, 2017. "A tale of two tails: Productivity distribution and the gains from trade," Journal of International Economics, Elsevier, vol. 104(C), pages 44-62.
    4. repec:hal:spmain:info:hdl:2441/2j87pv5ou185f980qgrpf9net0 is not listed on IDEAS
    5. Ana M. Fernandes & Peter J. Klenow & Sergii Meleshchuk & Martha Denisse Pierola & Andrés Rodríguez- Clare, 2023. "The Intensive Margin in Trade: How Big and How Important?," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 320-354, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Demand uncertainty; Firm size distribution; Extensive margin; Selection; Trade elasticities; Welfare;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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