The attention on multi-product firms has focused primarily on firms' product scope---i.e., how many products firms sell---rather than on which products they co-produce and sell. We address this by developing a stochastic heterogeneous-firm model that allows for correlations in production efficiencies across products and in consumers' tastes across products and destinations. Our estimation strategy centers on a novel extension of generalized score matching. We use Chinese export data for the leather sector. The estimates reveal a clustered co-exportation structure consistent with correlated efficiency shocks across products sharing similar production processes.
JEL codes: F12, L25, L11, C34, C38, F14.
International trade flows show strong persistence over time. This holds for yearly data and especially for higher-frequency data such as monthly data. Standard gravity theory cannot explain the persistence, i.e., why lagged trade flows should enter as an explanatory variable for current trade flows. We develop a structural dynamic gravity framework where the persistence stems from firms' sluggish adjustment of destination-specific prices, akin to sticky pricing in macroeconomics but with a bilateral focus. Our theoretical framework provides a micro-foundation for a gravity equation with lagged trade flows. We show that if persistence is ignored, standard gravity estimates of trade policy changes such as tariff cuts are initially biased downwards and then grow over time. As an alternative, we provide a two-part gravity estimation method to account for the persistence. Using OECD trade data at varying frequencies, we document the persistence of trade flows and estimate the share of firms that sluggishly adjust prices. Consistent with the literature on nominal rigidities, we find a high degree of price stickiness at monthly frequency and a lower degree at annual frequency. Our results help to explain the propagation of trade cost shocks to trade, prices and welfare over the short and long run.
JEL codes: E31, F13, F14, F41.
This paper studies how international firms hedge against trade-cost uncertainty. We analyze two margins of adjustment: foreign market entry (exporting versus foreign investment) and invoicing in free-on-board (FOB) or cost-insurance-freight-inclusive (CIF) prices. Under oligopolistic competition and price rigidity, trade-cost volatility jointly shapes entry and invoicing choices. Firms with small market shares prefer exporting and FOB-price invoicing, while firms with large market shares favor foreign investment and CIF-price invoicing. Using a novel measure of trade-cost volatility constructed from French customs data, we provide empirical support for these mechanisms and document the joint determination of entry and invoicing decisions. Counterfactual analyses based on the structurally estimated and calibrated model indicate that trade-cost uncertainty has sizable effects on these decisions.
JEL codes: F12, F23, F31.
We analyse firms' sourcing decisions under institutional uncertainty. Firms learn from offshoring behaviour, generating information spillovers and a sequential offshoring equilibrium led by the most productive firms. With multiple countries, these spillovers make beliefs self-reinforcing: early offshoring concentrated in one country raises its perceived attractiveness, potentially directing suppliers away from locations with better fundamentals. This generates multiple equilibria with consequences for countries' revealed comparative advantage and welfare. Using firm-level data from France, we find support for the sequential offshoring path, and show that information spillovers---alongside institutional fundamentals---shape firms' location choices.
JEL codes: F10, F14, D81, D83, F23.
Institutions affect the organisation of global value chains (GVCs). I analyse the organisational choices of heterogeneous firms in a model of incomplete contracts and uncertainty about foreign institutions. Under uncertainty, the model shows a sequential offshoring equilibrium path led by the most productive firms in the market. Other firms sequentially follow as the former reveal information about offshore institutional conditions and uncertainty reduces through learning. The sequential offshoring process intensifies competition in final-good markets, affecting the optimal organisation of the GVCs: firms initially choose foreign vertical integration (i.e., FDI), but the stronger progressively competition tilts the balance towards foreign outsourcing (i.e., arm's length trade). Thus, the least productive offshoring firms sequentially shift from foreign integration to foreign outsourcing. Empirical models with sector-level data of US manufacturing sectors provide supportive evidence of the model's predictions.
JEL codes: D23, D81, D83, F23.