How do firms adjust when trade stops?

Povilas Lastauskas, Aurelija Proskute and Alminas Zaldokas

Journal of Economic Behavior & Organization, 2023, vol. 216, issue C, 287-307

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 full-time employment. Investment reacts immediately but also additionally in the later periods if part-time employment adjustments that proxy for the firm's exposure to the permanence of the shock are large. 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)
Date: 2023
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Working Paper: 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:eee:jeborg:v:216:y:2023:i:c:p:287-307

DOI: 10.1016/j.jebo.2023.09.004

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