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

55 Pages Posted: 22 Nov 2010 Last revised: 29 Mar 2021

See all articles by Ivan Cherkashin

Ivan Cherkashin

Pennsylvania State University - College of the Liberal Arts - Department of Economic

Svetlana A. Demidova

Department of Economics, McMaster University

Hiau Looi Kee

World Bank - Development Research Group (DECRG)

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2010

Abstract

This paper builds a tractable partial equilibrium model in the spirit of Melitz (2003), which incorporates two dimensions of heterogeneity: firms specific productivity shocks and firm-market specific demand shocks. The structural parameters of interest are estimated using only cross-sectional data, and counterfactual experiments regarding the effects of reducing costs, both fixed and marginal, or of trade preferences (with distortionary Rules of Origin) offered by an importing country are performed. Our counterfactuals make a case for "trade as aid" as such policies can create a ""win-win-win" scenario and are less subject to the usual worries regarding the efficacy of direct foreign aid. They also suggest that reducing fixed costs at various levels can be quite effective as export promotion devices, with the exports induced per dollar spent ranging from .4 to 25.

Suggested Citation

Cherkashin, Ivan and Demidova, Svetlana A. and Kee, Hiau Looi and Krishna, Kala, Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments (November 2010). NBER Working Paper No. w16557, Available at SSRN: https://ssrn.com/abstract=1712235

Ivan Cherkashin (Contact Author)

Pennsylvania State University - College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
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Svetlana A. Demidova

Department of Economics, McMaster University ( email )

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Hiau Looi Kee

World Bank - Development Research Group (DECRG) ( email )

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Kala Krishna

Pennsylvania State University - Department of Economics ( email )

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United States
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814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

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