The Intensive Margin in Trade

66 Pages Posted: 29 Oct 2018

See all articles by Ana M. Fernandes

Ana M. Fernandes

World Bank - International Trade Division; World Bank

Peter J. Klenow

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Sergii Meleshchuk

University of California, Berkeley

Denisse Pierola

Inter-American Development Bank (IDB)

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: October 2018

Abstract

The Melitz model highlights the importance of the extensive margin (the number of firms exporting) for trade flows. Using the World Bank's Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries, we find that around 50% of variation in exports is along the extensive margin --- a quantitative victory for the Melitz framework. The remaining 50% on the intensive margin (exports per exporting firm) contradicts a special case of Melitz with Pareto-distributed firm productivity, which has become a tractable benchmark. This benchmark model predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. We find that moving from a Pareto to a lognormal distribution allows the Melitz model to match the role of the intensive margin in the EDD. We use likelihood methods and the EDD to estimate a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs and demand shifters, and use "exact hat algebra" to quantify the effects of a decline in trade costs on trade flows and welfare in the estimated model. The welfare effects turn out to be quite close to those in the standard Melitz-Pareto model when we choose the Pareto shape parameter to fit the average trade elasticity implied by our estimated Melitz-lognormal model, although there are significant differences regarding the effects on trade flows.

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Suggested Citation

Fernandes, Ana Margarida and Klenow, Peter J. and Meleshchuk, Sergii and Pierola, Denisse and Rodríguez-Clare, Andrés, The Intensive Margin in Trade (October 2018). NBER Working Paper No. w25195. Available at SSRN: https://ssrn.com/abstract=3274421

Ana Margarida Fernandes (Contact Author)

World Bank - International Trade Division

1818 H Street, N.W.
Washington, DC 20433
United States

World Bank ( email )

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HOME PAGE: http://econ.worldbank.org/staff/afernandes

Peter J. Klenow

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Sergii Meleshchuk

University of California, Berkeley

Denisse Pierola

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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