The Intensive Margin in Trade
Is the variation in bilateral trade flows across countries primarily due to differences in the number of exporting firms (the extensive margin) or in the average size of an exporter (the intensive margin)? And how does this affect the estimation an...
| Main Authors: | , , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/640381540579001233/The-Intensive-Margin-in-Trade http://hdl.handle.net/10986/30645 |
| Summary: | Is the variation in bilateral trade
flows across countries primarily due to differences in the
number of exporting firms (the extensive margin) or in the
average size of an exporter (the intensive margin)? And how
does this affect the estimation and quantitative
implications of the Melitz (2003) trade model? The benchmark
Melitz model with Pareto-distributed firm productivity and
fixed costs of exporting, predicts that, conditional on the
fixed costs of exporting, all variation in exports across
trading partners should occur on the extensive margin. This
paper subjects this theoretical prediction to a reality
check drawing upon the World Bank's Exporter Dynamics
Database (EDD) which has firm-level exports from 50
developing countries to all destinations. Around 50 percent
of the variation in exports across trading partners is shown
to be along the intensive margin, contradicting the
benchmark Melitz-Pareto model. The paper finds that moving
from a Pareto to a lognormal distribution of firm
productivity allows the Melitz model to successfully match
the role of the intensive margin evident in the EDD. The
paper then studies the implications of our findings for
quantitative trade theory. Using likelihood methods and the
EDD, a generalized Melitz model with a joint lognormal
distribution for firm productivity, fixed costs and demand
shifters is estimated, and exact hat algebra is used to
quantify the counterfactual effects of a decline in trade
costs on trade flows and welfare in the estimated model.
Finally, these effects are compared to those that would be
predicted by the Melitz-Pareto model, with the Pareto shape
parameter chosen to match the average trade elasticity
implied by the estimated Melitz-lognormal model. The paper
shows that the effects on welfare turn out to be quite close
to those in the standard Melitz-Pareto model even though the
effects on trade flows remain different. |
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