Adapting to Sanctions: Evidence from Firm Response and Market Reallocation in Iran

64 Pages Posted: 19 Mar 2022

See all articles by Ebad Ebadi

Ebad Ebadi

George Washington University - Department of Economics

Date Written: Jan 10, 2022

Abstract

How do targeted firms respond to international trade sanctions? While the macroeconomic effect of trade sanctions has been extensively studied, little is known about how trade sanctions shape firm dynamics and their asymmetric effects in a targeted country. Exploring detailed Iranian manufacturing firm surveys, I examine microeconomic effects of the 2012-2013 U.S. and EU trade sanctions against Iran due to Iran’s nuclear program. Empirical analysis shows that the sanctions cut Iranian firms’ exports in half and imports by over 30 percent and, on average, reduced firm-level productivity, profit, revenue, and employment. However, intriguingly, exporting firms were found to mitigate negative effects of sanctions through increased presence in the domestic market, transferring sanction shocks to non-exporting firms. At the same time, importing firms responded to sanctions by sourcing more domestic inputs at the expense of non-importing firms. Based on a stylized model featuring heterogeneous firms with capacity constraints, I show that the export sanctions increased consumer welfare by 4.35 percent by decreasing domestic prices for a given income level. In contrast, import sanctions led to a 7.5 percent consumer welfare loss by increasing prices. The stylized model implies alleviating exporting firm capacity constraints during adverse trade shocks increases positive impacts through export channels.

Keywords: Asymmetric effects, Capacity constraints, Consumer welfare, Firm behavior, Foreign policy, Increasing marginal cost, International trade, Manufacturing industries, Sanctions

JEL Classification: F51, F14, F12, O53, D57

Suggested Citation

Ebadi, Ebad, Adapting to Sanctions: Evidence from Firm Response and Market Reallocation in Iran (Jan 10, 2022). Available at SSRN: https://ssrn.com/abstract=4025431 or http://dx.doi.org/10.2139/ssrn.4025431

Ebad Ebadi (Contact Author)

George Washington University - Department of Economics ( email )

United States

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