Working Paper: NBER ID: w12725
Authors: Svetlana Demidova; Hiau Looi Kee; Kala Krishna
Abstract: This paper provides a new heterogeneous firm model for trade where firms differ in their productivity and experience different market demand shocks. The model incorporates variations in trade policy, trade preferences, and the rules of origin needed to obtain them, to reflect real world differences faced by Bangladeshi garment exporters in the US and EU. We estimate firms' productivity using an extension of the Olley Pakes procedure that accounts for the biases arising from both demand shocks and productivity being unobserved. Predictions of the model are then tested non-parametrically and are shown to be supported empirically.
Keywords: Trade Policy; Sorting; Heterogeneous Firms; Bangladeshi Apparel Exporters
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in trade policies between the US and EU (F13) | sorting among firms (L20) |
| More productive firms are likely to export to the US (F12) | sorting among firms (L20) |
| Less productive firms tend to export only to the EU (F14) | sorting among firms (L20) |
| Favorable demand shocks in the US (E39) | probability of a firm exclusively exporting to the EU (F10) |
| Adverse demand shocks in the EU (F41) | probability of a firm exclusively exporting to the EU (F10) |
| Increases in productivity (O49) | probability of exporting to both markets (F10) |
| Favorable demand shocks in both the US and EU (F69) | probability of exporting to both markets (F10) |
| Firms meeting rules of origin (ROOs) (L20) | productivity (O49) |
| Compliance with ROOs (F13) | sorting mechanism for firms (L20) |