Excessive Entry and Exit in Export Markets

44 Pages Posted: 29 May 2019

See all articles by Hiroyuki Kasahara

Hiroyuki Kasahara

University of British Columbia, Vancouver School of Economics

Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); The University of Hong Kong - Faculty of Business and Economics; CESIfo; Kiel Institute for the World Economy

Date Written: May 2019

Abstract

Using transaction-level data for all Chinese firms exporting between 2000 and 2006, we find that on average 78% of exporters to a country in a given year were new exporters. Among these new exporters, an average of 60% stopped serving the same country the following year. These rates are higher if the destination country is a market with which Chinese firms are less familiar. We build a simple two-period model with imperfect information, in which beliefs about their foreign demand are determined by learning from neighbors. In the model, a high variance of the prior distribution of foreign demand induces firms to enter new markets. This is because the profit function is convex in perceived foreign demand due to the option of exiting, which insures against the risk of low demand realization. We then use our micro data to empirically examine several model predictions, and find evidence to support the hypothesis that firms' high entry and exit rates are outcomes of their rational self-discovery of demand in an unfamiliar market.

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Suggested Citation

Kasahara, Hiroyuki and Tang, Heiwai, Excessive Entry and Exit in Export Markets (May 2019). NBER Working Paper No. w25878, Available at SSRN: https://ssrn.com/abstract=3395640

Hiroyuki Kasahara (Contact Author)

University of British Columbia, Vancouver School of Economics ( email )

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Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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The University of Hong Kong - Faculty of Business and Economics ( email )

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Kiel Institute for the World Economy ( email )

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