Working Paper Series
Firm Heterogeneity and Country Size Dependent Market Entry Cost
() and Rikard Forslid
Abstract: This paper introduces a market size dependent firm entry
cost into the Melitz (2003) model. This is a relatively small
generalisation, which preserves the analytical solvability of the model.
Nevertheless, our model yields several new results that are in line with
data. First, the average productivity of firms located in a market
increases in the size of the market. Second, the productivity of exporters
is U-shaped with reference to export market size. Third, the productivity
premium (the difference in average productivity) between exporters and
non-exporters decreases in the home country size. Fourth, we derive a set
of new results related to trade volume. It is shown that when the fixed
entry cost of exporting declines, for instance as the result of economic
integration, export shares converge. This prognosis is supported by the
empirical section of the paper. Fifth, we use a multicountry version of our
model to derive a gravity equation. Our specification yields a gravity
equation ā la Anderson and van Wincoop (2003), but where GDP per capita
enters as an additional explanatory variable.
Keywords: Heterogenous Firms; Market Size; Beachhead Costs; (follow links to similar papers)
JEL-Codes: D21; F12; F15; (follow links to similar papers)
27 pages, February 23, 2009
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