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

58 Pages Posted: 20 May 2011

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: April 2011

Abstract

The authors study the effects of tariffs in a dynamic variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. With fixed costs of starting to export that are on average 3.7 times as large as the costs incurred to continue as an exporter, the model can match both the size distribution of exporters and annual transition in and out of exporting among US manufacturing establishments. The authors find that the tariff equivalent of these fixed costs is nearly 30 percentage points. They use the calibrated model to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade equivalent to 1.03 percent of steady state consumption. Considering the transition dynamics following the cut in tariffs, they find that the model predicts economic activity overshoots its steady state, with the peak in output coming 10 years after the trade reform. Because of this overshooting, steady state changes in consumption understate the welfare gain to trade reform. The authors also find simpler trade models that abstract from these export dynamics provide a poor approximation of the aggregate responses from our more general model.

Keywords: Sunk cost, …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 (April 2011). FRB of Philadelphia Working Paper No. 11-19. Available at SSRN: https://ssrn.com/abstract=1839424 or http://dx.doi.org/10.2139/ssrn.1839424

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

Register to save articles to
your library

Register

Paper statistics

Downloads
59
Abstract Views
584
rank
220,764
PlumX Metrics