Working Paper: CEPR ID: DP8458
Authors: Peter Egger; Michael Pfaffermayr
Abstract: This paper develops a structural empirical general equilibrium model of aggregate bilateral trade with path dependence of country-pair level exporter status. Such path dependence is motivated through informational costs about serving a foreign market for first-time entry of (firms in) an export market versus continued export services to that market. We embed the theoretical model into a structural dynamic stochastic econometric model of bilateral selection into export markets and apply it to a data-set of aggregate bilateral exports among 120 countries over the period 1995-2004. In particular, we disentangle the role of changes in trade costs, in labor endowments, and in total factor productivity for trade, bilateral market entry, numbers of firms active, and welfare. Dynamic gains from trade differ significantly from static ones, and path-dependence in market entry cushions effects of impulses in fundamental variables that are detrimental to bilateral trade.
Keywords: bilateral trade flows; dynamic random effects model; gravity equation; sample selection
JEL Codes: F10; F12; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past export status (F10) | current trade activity (F19) |
| reductions in trade costs (F12) | nominal bilateral exports (F10) |
| increases in labor endowments (J49) | bilateral exports (F10) |
| increases in total factor productivity (O49) | bilateral exports (F10) |
| knowledge gained from prior market entry (F23) | future fixed costs (G31) |