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

57 Pages Posted: 20 Apr 2016 Last revised: 30 Apr 2018

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: January 1, 2015

Abstract

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. Counterfactualexperiments 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.

Keywords: International Trade and Trade Rules, Trade and Multilateral Issues, Trade Policy, Rules of Origin, Transport Services, Pulp & Paper Industry, Textiles, Apparel & Leather Industry, Common Carriers Industry, Food & Beverage Industry, General Manufacturing, Business Cycles and Stabilization Policies, Plastics & Rubber Industry, Construction Industry

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 (January 1, 2015). World Bank Policy Research Working Paper No. 7156, Available at SSRN: https://ssrn.com/abstract=2546150

Ivan Cherkashin (Contact Author)

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

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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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