Firm Heterogeneity and Costly Trade : A New Estimation Strategy and Policy Experiments

This paper builds a tractable partial equilibrium model to help explain the role of trade preferences given to developing countries, as well as the efficacy of various subsidy policies. The model allows for firm level heterogeneity in demand and pr...

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Bibliographic Details
Main Authors:	Cherkashin, Ivan, Demidova, Svetlana, Kee, Hiau Looi, Krishna, Kala
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank Group, Washington, DC 2015
Subjects:	ADVERSE IMPACT ADVERTISING AVERAGE PRICE CAPACITY CONSTRAINTS CHANGE IN DEMAND COMPETITIVE PRICES COMPETITIVENESS CONSTANT MARGINAL COSTS CONSUMER PRICES CONSUMER SURPLUS CONSUMERS COST INCREASE CURRENCY DEMAND FUNCTION DEVELOPMENT POLICY DISTORTIONS DOLLAR VALUE DOMESTIC MARKET ECONOMIC OUTLOOK ECONOMIES OF SCALE ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL ANALYSIS EQUILIBRIUM EQUILIBRIUM CONDITIONS ESTIMATION STRATEGY EXPECTED RETURN EXPENDITURE EXPORT GROWTH EXPORT MARKET EXPORT MARKETS EXPORT REVENUE EXPORTER EXPORTERS EXPORTS EXTERNALITIES FAIR FAIRS FIXED COSTS FOREIGN EXCHANGE GDP GDP PER CAPITA GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODEL GENERALIZED SYSTEM OF PREFERENCES HUMAN CAPITAL IMPORT IMPORTS INTERNATIONAL ECONOMICS INTERNATIONAL TRADE LABOR FORCE LDCS LESS DEVELOPED COUNTRIES LEVERAGE LONG-RUN EQUILIBRIUM M1 MARGINAL COST MARGINAL UTILITY MARKET DEMAND MARKET ENTRY MARKET ENTRY COSTS MARKET FORCES MARKET PENETRATION MARKET SHARE MARKET SHARES NET EXPORTS OPEN ECONOMY POLICY ENVIRONMENT POLITICAL ECONOMY POSITIVE SPILLOVERS PRICE INDEX PRICE INDICES PRODUCERS PRODUCT QUALITY PRODUCTION COSTS PRODUCTIVITY QUOTA PRICES QUOTAS RECESSION SALES STANDARD DEVIATIONS SUBSIDY POLICIES SUBSTITUTION SUPPLIERS SURPLUS TAX REVENUES TOTAL EXPORTS TOTAL SALES TRADE BARRIERS TRADE DIVERSION TRADE FACILITATION TRADE LIBERALIZATION TRADE POLICIES TRADE POLICY TRADING PARTNER TRADING PARTNERS TRANSPORTATION COSTS TURNOVER UNCERTAINTIES URUGUAY ROUND UTILITY FUNCTION WAGES WEIGHTS WELFARE GAINS WORLD MARKET WORLD TRADE
Online Access:	http://documents.worldbank.org/curated/en/2015/01/23173044/firm-heterogeneity-costly-trade-new-estimation-strategy-policy-experiments http://hdl.handle.net/10986/21153

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Summary:	This paper builds a tractable partial equilibrium model to help explain the role of trade preferences given to developing countries, as well as the efficacy of various subsidy policies. The model allows for firm level heterogeneity in demand and productivity and lets the mass of firms that enter be endogenous. Trade preferences given by one country have positive spillovers on exports to others in this model. Preferences given by the European Union to Bangladesh in an industry raise profits, resulting in entry, and some of these firms also export to the United States. The parameters of the model are estimated using cross sectional customs data on Bangladeshi exports of apparel to the United States and European Union. Counterfactual experiments regarding the effects of reducing costs, both fixed and marginal, or of trade preferences offered by an importing country are performed. The counterfactuals show that reducing fixed costs at various levels has very different effects and suggest that such reductions are more effective in promoting exports when applied at later stages when firms are more committed to production. A subsidy of 1.5 million dollars to industry entry costs raises exports by only 0.4 dollars for every dollar spent, but when applied to fixed costs of production, it raises exports by $25 per dollar spent.

Firm Heterogeneity and Costly Trade : A New Estimation Strategy and Policy Experiments

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