Truncated Firm Productivity Distributions and Trade Margins

32 Pages Posted: 12 Jul 2017 Last revised: 5 Jan 2019

See all articles by Cletus C. Coughlin

Cletus C. Coughlin

Federal Reserve Bank of St. Louis - Research Division

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Date Written: 2017-07-07

Abstract

A standard theoretical prediction is that average exports are independent of tariff rates when the underlying distribution of firm productivities is assumed to be the widely-used Pareto distribution. Assuming that the underlying distribution has no upper bound is undoubtedly inaccurate and produces theoretical results at odds with empirical results. In contrast, we show that upper-truncation of the Pareto distribution makes average exports rise with trade liberalization. This result is derived analytically, and is supported by simulations. We extend our analysis to the cases of lognormal and Fréchet distributions, which are also frequently used by trade economists. Our findings for lognormal and Fréchet distributions are qualitatively similar to the findings using the truncated Pareto.

Keywords: Truncated probability distributions, Extensive and intensive margins of trade, Import tariff, Pareto, Lognormal, Fréchet.

JEL Classification: F1

Suggested Citation

Coughlin, Cletus C. and Bandyopadhyay, Subhayu, Truncated Firm Productivity Distributions and Trade Margins (2017-07-07). FRB St. Louis Working Paper No. 2017-18. Available at SSRN: https://ssrn.com/abstract=3000867 or http://dx.doi.org/10.20955/wp.2017.018

Cletus C. Coughlin (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

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