Asymmetric Trade with Heterogeneous Firms

Abstract

When countries are asymmetric, trade with heterogeneous firms can crowd in, rather than crowd out, less productive firms, and less productive firms almost always specialize in export. Whether and how these phenomena will arise depends on a country’s standing in the world. Our study helps reconcile empirical findings that are contradictory to the existing theoretical literature, and highlights the importance of country heterogeneity in understanding trade with firm heterogeneity.

Keywords: Firm heterogeneity, Asymmetric trade, Reverse-selection, Crowd-in, Country standing

JEL Classification: F10, F12, F14