Hedging Trade-Cost Uncertainty

Hartmut Egger, Peter Egger, Katharina Erhardt and Leandro Navarro

No 21996, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies how international firms hedge against trade-cost uncertainty. We analyze two margins of adjustment: foreign market entry (exporting versus foreign investment) and invoicing in free-on-board (FOB) or cost-insurance-freight-inclusive (CIF) prices. Under oligopolistic competition and price rigidity, trade-cost volatility jointly shapes entry and invoicing choices. Firms with small market shares prefer exporting and FOB-price invoicing, while firms with large market shares favor foreign investment and CIF-price invoicing. Using a novel measure of trade-cost volatility constructed from French customs data, we provide empirical support for these mechanisms and document the joint determination of entry and invoicing decisions. Counterfactual analyses based on the structurally estimated and calibrated model indicate that trade-cost uncertainty has sizable effects on these decisions.

Keywords: Trade-cost uncertainty; Oligopoly; Invoicing; Foreign market entry (search for similar items in EconPapers)
JEL-codes: F12 F23 F31 (search for similar items in EconPapers)
Date: 2026-09
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