Multi-Product Firms and Trade Liberalization

53 Pages Posted: 14 Dec 2006

See all articles by Andrew B. Bernard

Andrew B. Bernard

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stephen J. Redding

Princeton University

Peter K. Schott

Yale University - School of Management; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2006

Abstract

This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during trade liberalization. Firm productivity in a given product is modeled as a combination of firm-level "ability" and firm-product-level "expertise", both of which are stochastic and unknown prior to the firm's payment of a sunk cost of entry. Higher firm-level ability raises a firm's productivity across all products, which induces a positive correlation between a firm's intensive (output per product) and extensive (number of products) margins. Trade liberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shed marginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce a smaller range of products after liberalization, they increase the share of products sold abroad as well as exports per product. All of these adjustments are shown to be relatively more pronounced in countries' comparative advantage industries.

Keywords: heterogeneous firms,endogenous product scope, love of variety, core competency

JEL Classification: F12, F13, L11

Suggested Citation

Bernard, Andrew B. and Redding, Stephen J. and Schott, Peter K., Multi-Product Firms and Trade Liberalization (December 1, 2006). Tuck School of Business Working Paper No. 2008-44. Available at SSRN: https://ssrn.com/abstract=951549 or http://dx.doi.org/10.2139/ssrn.951549

Andrew B. Bernard (Contact Author)

Dartmouth College - Tuck School of Business ( email )

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HOME PAGE: http://mba.tuck.dartmouth.edu/pages/faculty/Andrew.Bernard/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR) ( email )

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Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~reddings/

Peter K. Schott

Yale University - School of Management ( email )

135 Prospect Street
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New Haven, CT 06520-8200
United States
203-436-4260 (Phone)
203-436-6974 (Fax)

HOME PAGE: http://www.som.yale.edu/faculty/pks4

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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