Research

Abstract: This paper examines the effect of  idiosyncratic 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 these elasticities. First, uncertainty lowers elasticities by lowering export participation thresholds (selection effect). Second, uncertainty alters the distribution and lowers the dispersion of   export selection shocks (the dispersion effect), which has an ambiguous effect on trade elasticities. We develop a novel methodology to quantify trade elasticities under uncertainty.  Applying methodology to Brazilian firm-level export data,  we find that the recovered elasticities are comparable to those in the Melitz-Pareto framework. Further, relative to a complete information framework, uncertainty amplifies trade elasticities, on average, emphasizing the dominating role of the dispersion effect - though the effect is heterogeneous across industries. The largest wedge in elasticity estimates between the two information environments is observed among highly substitutable products or those with high uncertainty. This  suggests that assuming a compete information framework could substantially understate the welfare gains from trade in such cases.

Note: The paper previously circulated under the title "Uncertainty and Trade Elasticities."

Abstract: Using Brazilian export data that, unlike many trade data sets, keep a full record of small export sales, this paper reconsiders trade elasticities and the welfare gains from trade.  Using the Brazilian data, this paper provides novel  evidence on the properties of the distributions of log-export sales and shows that  the Double Exponentially Modified Gaussian (EMG) distribution parsimoniously captures these properties.  Using the Double EMG distribution in a standard monopolistic competition model of trade, this paper demonstrates that data truncation, that is prevalent in many data sets, leads to an upward bias in measuring  the partial elasticity of trade with respect to variable trade costs.  This bias subsequently leads to the underestimation of the gains from trade by 1% to 9% depending on the extent of data truncation, a range that is commensurate with typical economic growth and large booms.

Abstract:  We document new facts about the evolution of firm performance and prices in  international markets, and propose a theory of firm dynamics emphasizing the  interaction between learning about demand and quality choice to explain the observed patterns. Using data from the Portuguese manufacturing sector, we find that: (1) firms with longer spells of  activity in export destinations tend to ship larger quantities at lower prices; (2) older  exporters tend to use more expensive inputs; (3) the volatility of output and input prices tends to decline with export experience; and (4) input prices and quantities tend  to increase with revenue growth within firms. We develop a model of endogenous input and output quality choices in a learning environment that is able to account for these patterns. Counterfactual  simulations reveal that minimum quality standards on traded goods reduce welfare by lowering entry  in export markets and reallocating resources from old and large towards young and small firms.

Abstract:  We develop a general equilibrium model of firm growth with learning about unobserved demand. Our framework introduces learning (Jovanovic, 1982) into a monopolistically competitive environment with firm productivity heterogeneity, a la Melitz (2003). The model correctly predicts that firm growth rates decrease with age, holding size constant, a fact that models focusing on idiosyncratic productivity shocks have difficulty matching. We calibrate the model using plant-level data and find that it matches growth and survival patterns well. Unlike the standard Melitz setup the model with learning is no longer efficient, leaving room for welfare improving policies. We illustrate how subsidies to the fixed costs of young firms can be welfare enhancing:  they allow young firms to avoid early exit and thus, benefit consumers through access to  a larger number of varieties.

Abstract: We show that estimates of the welfare gains from trade based on new heterogeneous firms trade models are not isomorphic between entry assumptions. In  a model with an exogenous pool of new entrants, in contrast to a free entry environment, aggregate profits accrue to consumers in the form of dividends. The extra adjustment in dividends  dampens the relative increase in real wage  as variable trade costs decline. As a result, the predicted estimates of the gains from trade are lower under exogenous entry relative to  free entry. This wedge grows with the extent of trade liberalization.

Abstract:  This paper explores the role of sunk costs versus learning in explaining persistence in exporting. Multiple studies attributed such persistence to sunk market-entry costs. This paper shows that similar patterns of exporting are also consistent with a learning mechanism and finds a strong empirical support for such a mechanism. Second, the paper empirically discriminates between the two competing theories, and finds that once learning is controlled for, the role of sunk costs in generating export persistence is at most forty percent of what is currently estimated in the literature. Finally, while in differentiated-products industries export persistence arises primarily due to learning, in the homogeneous-products industries such persistence arises primarily due to the sunk-cost mechanism.

Note: The paper previously circulated under the title "State Dependence in Export Market Participation: Does Exporting Age Matter?"

Abstract: New exporters add and drop products with much greater frequency than old exporters. This paper explains this behavior with a model of demand learning in which an exporter's profitability on the demand side is determined by a time-invariant firm–destination appeal index, and transient firm–destination–year preference shocks. New exporters must learn about their appeal indices in the presence of these shocks, and respond to fluctuations in demand by adding and dropping products more frequently than older exporters because they have less information about their attractiveness to consumers. Calibrated to match cross-sectional and dynamic moments of the distribution of sales and scope, the model quantitatively accounts for two thirds of the extent of product switching. The model further predicts that in response to a decline in trade costs, existing exporters add new products and new exporters enter a destination. Counterfactual implies that the contribution of product adding to export growth resulting from a fall in trade costs is substantially larger than the contribution of exporter entry.