Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 08-20: Endogenous Markups, Firm Productivity and International Trade: : Testing SomeMicro-Level Implications of theMelitz-Ottaviano Model

Flora Bellone , Patrick Musso , Lionel Nesta and Frederic Warzynski ()
Additional contact information
Flora Bellone: GREDEG-CNRS, Postal: GREDEG-CNRS
Patrick Musso: GREDEG-CNRS, Postal: GREDEG-CNRS
Lionel Nesta: GREDEG-CNRS, Postal: GREDEG-CNRS
Frederic Warzynski: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: In this paper, we test key micro-level theoretical predictions ofMelitz and Ottaviano (MO) (2008), a model of international trade with heterogenous firms and endogenous mark-ups. At the firm-level, the MO model predicts that: 1) firm markups are negatively related to domestic market size; 2) markups are positively related to firm productivity; 3) markups are negatively related to import penetration; 4) markups are positively related to firm export intensity and markups are higher on the export market than on the domestic ones in the presence of trade barriers and/or if competitors on the export market are less efficient than competitors on the domestic market. We estimate micro-level price cost margins (PCMs) using firm-level data extending the techniques developed by Hall (1986, 1988) and extended by Domowitz et al. (1988) and Roeger (1995) for the French manufacturing industry from 1986 to 2004. We find evidence in favor of these theoretical predictions.

Keywords: Endogenous markups; Export behavior; Productivity; Firm-level

JEL-codes: D24; F12

48 pages, September 1, 2008

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