Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics

Yanping Liu

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Theoretical and empirical work on export dynamics has generally assumed constant marginal production cost and therefore ignored domestic product market conditions. However, recent studies have documented a negative correlation between firms' do- mestic and export sales growth, suggesting that firms can be capacity constrained in the short run and face increasing marginal production cost. This paper develops and estimates a dynamic model of export behavior incorporating short-term capacity con- straints and endogenous capital investment. Consistent with the empirical evidence, the model features firms' sales substitutions across markets in the short term, and generates time-varying transition paths of firm responses through firms' capital adjust- ments over time. The model is fit to a panel of plant-level data for Colombian manufacturing indus- tries and used to simulate how firm responses transition following an exchange-rate devaluation. The results indicate that incorporating capital adjustment costs is quan- titatively important, as shown by the length of the transition period, and the difference between the short-run and long-run exchange rate elasticity of exports. Firms' expeca- tion on the permanence of the policy changes also matters.

Keywords: International trade; heterogeneous firms; capacity constraints; capital adjustment costs; firm dynamics; firm panel data (search for similar items in EconPapers)
JEL-codes: F12 F14 L11 (search for similar items in EconPapers)
Date: 2015-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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