Endogenous Firm Heterogeneity and the Dynamics of Trade Liberalization

Journal of International Economics, Vol. 74, No. 2, 2008

30 Pages Posted: 6 Sep 2005

See all articles by Josh Ederington

Josh Ederington

University of Kentucky - Department of Economics

Phillip McCalman

University of California, Santa Cruz - Department of Economics

Date Written: August 2004

Abstract

In this paper, we build a dynamic model with endogenous firm-level productivity that generates firm heterogeneity as an equilibrium outcome. Firm heterogeneity arises in equilibrium from the gradual diffusion of a technological innovation through the industry. We investigate the effects of international trade on technological diffusion and show that trade has a generally positive impact on the equilibrium rate of adoption (and hence firm-level productivity). In addition, the model can replicate the stylized fact that exporters are larger and more productive than non-exporters. Finally, we show that the model can explain two puzzling facts from the Canadian experience with NAFTA: Why US tariff reductions decreased the number of Canadian firms; and why Canadian tariff reductions lowered the productivity of the most productive Canadian firms but raised it for the least productive firms.

Keywords: trade, productivity, technology adoption, industry dynamics

JEL Classification: F1, F12, F13, O3

Suggested Citation

Ederington, Josh and McCalman, Phillip, Endogenous Firm Heterogeneity and the Dynamics of Trade Liberalization (August 2004). Journal of International Economics, Vol. 74, No. 2, 2008 , Available at SSRN: https://ssrn.com/abstract=794624

Josh Ederington (Contact Author)

University of Kentucky - Department of Economics ( email )

335 Business and Economics Building
Lexington, KY 40506
United States

Phillip McCalman

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States
(831) 459-4381 (Phone)
(831) 459-5900 (Fax)

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