Cost Linkages Transmit Volatility Across Markets
Daniel Nguyen and
No 2010-03, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics
We present and test a model relating a firm's idiosyncratic cost, its exporting status, and the volatilities of its domestic and export sales. In prior models of trade, supply costs for domestic and exports were linear and thus additively separable. We introduce a nonlinear cost function in order to link the domestic and export supply costs. This theoretical contribution has two new implications for the exporting firm. First, the demand volatility in the foreign market now directly affects the firm's domestic sales volatility. Second, firms hedge domestic demand volatility with exports. The model has several testable predictions. First, larger firms have lower total and domestic sales volatilities. Second, foreign market volatility increases domestic sales volatilities for exporters. Third, exporters allocate output across both markets in order to reduce total sales volatility. We find evidence for these predictions with Danish firms operating between 1992 and 2006.
Pages: 29 pages
References: Add references at CitEc
Citations: View citations in EconPapers (28) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://web.econ.ku.dk/eprn_epru/Workings_Papers/wp-10-03.pdf [301 Moved permanently]--> https://web.econ.ku.dk/eprn_epru/Workings_Papers/wp-10-03.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kud:epruwp:10-03
Access Statistics for this paper
More papers in EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics ï¿½ster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Hoffmann ().