Establishment Heterogeneity, Exporter Dynamics, and the Effects of Trade Liberalization

49 Pages Posted: 13 Aug 2007

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Horag Choi

Monash University

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

The authors study a variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. They calibrate the model to match the employment size distribution of US manufacturing establishments. Export participation in the calibrated model is then compared to the data on US manufacturing exporters. With fixed costs of starting to export about 3.9 times as large as costs of continuing as an exporter, the model can match both the size distribution of exporters and transition into and out of exporting. The calibrated model is then used to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade. Contrary to the view that the gains to lowering tariffs are larger in models with export decisions, they find that steady state consumption increases by less in their benchmark model of exporting than in a similar model without fixed costs. However, they also find that comparisons of steady state consumption understate the welfare gains to trade reform in models with fixed costs and overstate the welfare gains in models without fixed costs. With fixed costs, tariffs lead to an overaccumulation of product varieties which can be used more effectively along the transition to the new steady state. Thus, following trade liberalizations economic activity overshoots its steady state, with the peak in output coming 10 years after the trade reform. Finally, the authors explore the impact of the key modelling assumptions in the theoretical literature for quantitative results.

Keywords: Sunk costs, fixed cost, establishment heterogeneity, tariff, welfare

JEL Classification: E31, F12

Suggested Citation

Alessandria, George A. and Choi, Horag, Establishment Heterogeneity, Exporter Dynamics, and the Effects of Trade Liberalization (July 2007). FRB of Philadelphia Working Paper No. 07-17. Available at SSRN: https://ssrn.com/abstract=1005173 or http://dx.doi.org/10.2139/ssrn.1005173

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
(215) 574-6402 (Phone)
(215) 574-4364 (Fax)

Horag Choi

Monash University ( email )

Private Bag 92019
Auckland
New Zealand

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