Working Paper: NBER ID: w23893
Authors: Shangjin Wei; Ziru Wei; Jianhuan Xu
Abstract: We argue that existence of public good does not necessarily imply market failure, and illustrate this point in the context of international trade. An influential hypothesis states that export pioneers are too few relative to social optimum because the first exporter's action creates an informational public good for all subsequent exporters. The hypothesis has been invoked to justify certain types of government interventions. We note, however, that such market failure requires two inequalities to hold simultaneously: the discovery cost is neither too low nor too high. Neither has to hold in the data. We propose a structural estimation framework to evaluate the hypothesis, and estimate the parameters based on the customs data of Chinese electronics exports. Our key finding is that "missing pioneers" are a low-probability event for large countries, but can be a serious problem for small economies.
Keywords: export pioneers; market failure; public goods; international trade
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| observable action of the first exporter (F10) | total fixed entry cost for subsequent exporters (F10) |
| size of the economy (E20) | probability of missing pioneers (C59) |
| missing pioneers (B32) | low probability event for large countries (O57) |
| size of the economy (E20) | likelihood of encountering missing pioneers (N50) |