Firm Heterogeneity and Country Size Dependent Market Entry Cost

Anders Akerman and Rikard Forslid

No 790, Working Paper Series from Research Institute of Industrial Economics

Abstract: This paper introduces a market size dependent firm entry cost into 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 à la Anderson and van Wincoop (2003), but where GDP per capita enters as an additional explanatory variable.

Keywords: Heterogenous Firms; Market Size; Beachhead Costs (search for similar items in EconPapers)
JEL-codes: D21 F12 F15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2009-02-23
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Firm Heterogeneity and Country Size Dependent Market Entry Costs (2009)
Working Paper: Firm Heterogeneity and Country Size Dependent Market Entry Costs (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0790

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