45 Pages Posted: 29 Nov 2010
Date Written: November 2010
Many new exporters give up exporting very shortly, despite substantial entry costs; others shoot up foreign sales and expand to new destinations. We develop a model based on experimentation to rationalize these and other dynamic patterns of exporting firms. We posit that individual export profitability, while initially uncertain, is positively correlated over time and across destinations. This leads to sequential exporting, where the possibility of profitable expansion at the intensive and extensive margins makes initial entry costs worthwhile despite high failure rates. Firm-level evidence from Argentinas customs, which would be difficult to reconcile with existing models, strongly supports this mechanism. Importantly, sequential exporting has novel policy implications: a reduction in trade barriers has delayed effects, while also promoting entry in third markets. This trade externality poses challenges for the quantification of the effects of trade liberalization programs and implies that the consequences of international trade agreements are significantly richer than traditional models suggest.
Keywords: Experimentation, Export dynamics, Learning, Trade liberalization, Uncertainty
JEL Classification: D21, F10, F13
Suggested Citation: Suggested Citation
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