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Firm Heterogeneity B J RS Chaney Melitz Helpman Hopenhayn.

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Presentation on theme: "Firm Heterogeneity B J RS Chaney Melitz Helpman Hopenhayn."— Presentation transcript:

1 Firm Heterogeneity B J RS Chaney Melitz Helpman Hopenhayn

2 Firm Heterogeneity: Motivation The Helpman-Krugman model features universal exporting by firms in a differentiated product industry: – every brand is produced by a single firm in just one country, which exports its output everywhere else in the world; – using non-iceberg transport costs or a different demand system can change this outcome. This does not provide a good description of firm-level data. In the data: – only a small fraction of firms export; – exporters sell most of their output domestically; – exporters are bigger than non-exporters; – exporters are more productive than nonexporters; – exporters pay higher wages than nonexporters.

3 Share of manufacturing firms that export CountryYearExporting firms, in per cent U.S.A Norway France Japan Chile Colombia Very few plants/firms export: – 18% of U.S. firms in 2002 (the proportion of exporting plants is higher as exporting plants are more likely to be owned by multi-plant firms) This number has been increasing steadily over the past 10 years: 14.6% of U.S. firms in 1992 – Same pattern holds for both developed and developing countries 17.4% of French firms in 1986

4 Share of exports of manufactures CountryYearTop 1% of firmsTop 10% of firms U.S.A Belgium France Germany Norway UK

5 Even at the 3-digit sectors there is significant heterogeneity:


7 Melitz Model for Firm Heterogeneity Adaption of Hopenhayn (1992) model of industry dynamics to monopolistic competition and general equilibrium –... but abstract from stochastic evolution of productivity at the firm level – (Note: product differentiation is crucial in explaining fixed export costs at the firm/product level) Key features: – Prior to entry, firms face some initial uncertainty concerning their future productivity – Firms must incur a sunk investment to enter the industry and subsequently passively learn about their productivity. (Entry is not otherwise restricted.) – Forward looking firms correctly anticipate future market conditions when making entry, exit, and export decisions. – No strategic interactions between firms: firms only care about market averages

8 Demand

9 Production

10 Firm behavior

11 Aggregation

12 Firm Entry and Exit Decisions

13 Firm Entry and Exit

14 Free Entry and the Value of Firms


16 Equilibrium in a closed economy Free entry and zero cutoff profit conditions determine the equilibrium cutoff level and average firm profit: The aggregate productivity level is set by the cutoff level P and R are uniquely identified by average profits and productivity Increases in profit dispersion across firms shifts up the Zero Cutoff Profit curve.










26 Changes in the Exposure to trade

27 Chaney 2005 Heterogeneity and the Gravity Model Develop a model for the extensive margin of trade Derive a gravity model to examine relationship between trade flows and trade barriers.

28 New assumptions in Chaney vs Melitz Many asymmetric countries with asymmetric trade barriers. No free entry: fixed number of firms per country Pareto distributed productivity shocks A numeraire sector to pin down wages.

29 Preferences

30 Productivity distribution

31 Ownership structure

32 Zero cutoff profit conditions

33 Aggregate Prices

34 Aggregate prices

35 Equilibrium exports and selection

36 Gravity Equation comparing Chaney with Krugman

37 Intensive versus extensive margins Intensive Margin Extensive Margin

38 Intensive versus extensive margins

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