Firm Heterogeneity and Country Size Dependent Market Entry Costs

Anders Akerman and Rikard Forslid

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper introduces a market size dependent firm entry cost into the Helpman, Melitz and Yeaple (2004) (HMY) version of 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 a la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.

Keywords: heterogenous firms; market size; market entry costs (search for similar items in EconPapers)
JEL-codes: D21 F12 F15 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Firm Heterogeneity and Country Size Dependent Market Entry Cost (2009)
Working Paper: Firm Heterogeneity and Country Size Dependent Market Entry Costs (2009)
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