Capacity Constrained Exporters: Identifying Increasing Marginal Cost

17 Pages Posted: 30 May 2017

See all articles by JaeBin Ahn

JaeBin Ahn

International Monetary Fund (IMF)

Alexander McQuoid

United States Naval Academy - Department of Economics

Date Written: July 2017

Abstract

This study revisits a central assumption of standard trade models: constant marginal cost technology. The presence of increasing marginal costs for exporters introduces significant market interdependence across borders missing from traditional models of international trade that rely on constant marginal cost technology. Such market interdependence represents an additional channel through which local shocks are transmitted globally. To identify increasing marginal cost at the level of the firm, we build in flexible production assumptions that nest increasing, decreasing, and constant marginal cost technology to an otherwise standard international trade model. We derive an estimating equation that can be taken directly to the data. Our structural equation explicitly guides our inference on the shape of the marginal cost curve from estimated coefficients. The results suggest that increasing marginal cost is predominant at the firm level. Moreover, utilizing plant‐level information on physical and financial capacity constraints, we find that the degree of increasing marginal cost is significantly exacerbated by both types of constraints. The evidence suggests that access to larger markets through greater international integration may not have the expected welfare gains typically predicted in standard models.

JEL Classification: F12, F14

Suggested Citation

Ahn, JaeBin and McQuoid, Alexander, Capacity Constrained Exporters: Identifying Increasing Marginal Cost (July 2017). Economic Inquiry, Vol. 55, Issue 3, pp. 1175-1191, 2017. Available at SSRN: https://ssrn.com/abstract=2976579 or http://dx.doi.org/10.1111/ecin.12429

JaeBin Ahn (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander McQuoid

United States Naval Academy - Department of Economics ( email )

589 McNair Road
Annapolis, MD 21402
United States

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