How Do Firms Adjust When Trade Stops?

Povilas Lastauskas, Aurelija Proskute and Alminas Zaldokas

No 114, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. 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: 62 pages
Date: 2023-03-02
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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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:lie:wpaper:114

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