How Do Firms Adjust When Trade Stops?

Povilas Lastauskas, Aurelija Proskute and Alminas Zaldokas

No 111, Working Papers from Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research

Abstract: We investigate how _rms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. We explore a unique event when, due to political reasons, unrelated to the underlying economic conditions, the exporters completely lost access to a major foreign market. In particular, in 2014 Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

Keywords: economic sanctions; firm adjustment margins; part-time employment; new export markets (search for similar items in EconPapers)
JEL-codes: D22 D25 F14 F16 F51 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2023-03
New Economics Papers: this item is included in nep-cis and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://cgr.sbm.qmul.ac.uk/CGRWP111.pdf

Related works:
Journal Article: How do firms adjust when trade stops? (2023)
Working Paper: How Do Firms Adjust When Trade Stops? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cgs:wpaper:111

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