The role of extensive and intensive margins and export growth

We investigate and compare countries' export growth based on their performance at the extensive and intensive export margins. Our empirical approach is motivated by an extension to the Melitz (2003) model of heterogeneous firms in which exporters are subject to a one-time sunk cost and also a per-period fixed cost. With imperfect information a firm may enter export markets but shortly exit when it learns its per-period fixed costs. We apply this insight to disaggregated export data and confirm that indeed most export relationships are very short lived. We then show that the survival issue is a significant factor in explaining differences in long run export performance. We find that developing countries would experience significantly higher export growth if they were able to improve their performance with respect to the two key components of the intensive margin: survival and deepening.     

Deconstructing gravity: trade costs and extensive and intensive margins

Abstract This paper uses data on US exports to decompose exports into the number of exporting firms (the extensive margin) and average export sales (the intensive margin). We show how a range of proxies for trade costs has different impacts on the two margins. Distance has a negative effect on both margins, but the magnitude is considerably larger for the extensive margin. Most of the variables capturing language, internal geography, infrastructure and import cost barriers work through the extensive margin. We show that these results are consistent with a Melitz‐style model of trade with heterogeneous firm productivity and fixed costs.     

The extensive and intensive margins of Spanish trade

Recent empirical research highlights that differences in trade flows across countries, products and years are governed by two margins: the intensive margin and the extensive margin. The analysis of the relative contribution of each margin is very important to determine which policies can be more efficient to foster trade at the aggregate, geographic, product or firm level. We use the whole universe of firm level transaction data to analyse the relative contribution of these margins to changes in Spanish trade flows during the 1997–2007 period. We first apply the methodology proposed by Bernard et al. (2009 Bernard, A.B., Jensen, J.B., Redding, S.J. and Schott, P.K. 2009. The margins of US trade. American Economic Review: Papers & Proceedings, 99(2): 487–93. [Crossref], [Web of Science ®] [Google Scholar]) to decompose trade variation over time into three components: net entry of firms, product-country switching and value growth by regular trading firms. The first two components correspond to the extensive margin and the last one refers to the intensive margin. We find that short-run changes in exports and imports are governed by firms’ intensive margin; however, in the long-run, both the extensive and the intensive margins are equally important to foster trade. We also examine the importance of the trade margins at the cross-sectional level for the year 2007. We find that large differences in the Spanish trade flows across countries and products, especially in the case of exports, are explained by the number of firms that participate in trade, which is consistent with the fact that the number of trading partners decline significantly with distance.     

Ethnic networks and trade: Intensive versus extensive margins

Ethnic networks have been associated with increased international trade, although studies have not differentiated between entry into foreign markets and trade expansion. We find that ethnic networks increase trade on the intensive margin but not on the extensive margin.     

The effect of immigrants on the extensive and intensive margins of trade

This study examines the impact of immigrants on the extensive and intensive margins of South Korean exports. Since trade data contain excessive zero trade flows, we adopt recently suggested Poisson and Gamma pseudo maximum likelihoods. ???Our finding shows that immigrant stock in South Korea has significant effect on both the extensive and intensive margins of South Korean exports. Immigrants’ network seems to decrease variable as well as fixed costs of trade.     

The intensive and the extensive margins: not only an international issue

Empirical evidence shows that quantity (intensive margin) and variety availability (extensive margin) have effects of different magnitude on populations’ welfare. Indeed, the pattern of a market dynamics may cause changes in welfare inequality. Low income consumers benefit more from quantity than high income consumers, who are more interested in enjoying variety. These facts have been usually addressed as consequences of trade liberalization by international trade theory. However, market dynamics are also present within the borders of every country. It is important to understand what forces, unrelated with international trade, affect these dynamics. This paper explores the transmission of different real shocks into market dynamics in a new-Keynesian closed economy. Results show that the source of the shock is crucial to determine the magnitude and direction of the effects on each margin.     

The 2009 Recovery Act: Stimulus at the extensive and intensive labor margins

This paper studies the effect of government stimulus spending on a novel aspect of the labor market: the differential impact of spending on the total wage bill versus employment. We analyze the 2009 Recovery Act via instrumental variables using a new instrument, the spending done by federal agencies that were not instructed to target funds towards harder hit regions. We find a moderate positive effect on jobs created/saved (i.e., the “extensive margin”) and also a significant increase in wage payments to workers whose job status was safe without Recovery Act funds (i.e., the “intensive margin”). Our point estimates imply that roughly one-half of the wage payments resulting from the act were paid at the intensive margin. To provide a theoretical underpinning for the estimates, we build a micro-founded dynamic model in which a firm meets new government demand with a combination of new hiring and increasing existing workers׳ average hours. Faced with hiring costs and an overtime premium, the firm responds by increasing hours along both margins. Our model analysis also provides insight into how government spending policy should be structured to lower the cost of generating new jobs. Finally, we catalogue survey evidence from Recovery Act fund recipients that reinforces the importance of the intensive labor margin.     

Intra-industry trade with multinational firms

Recent developments, including the analysis of firm-level adjustment to falling trade costs, have contributed to a revival of interest in intra-industry trade (IIT). Most empirical work still relies on the standard Grubel-Lloyd measure. This however refers only to international trade, disregarding income flows stimulated by repatriated profits of multinational firms. Given the overwhelming importance of the latter, this is a major shortcoming. This paper provides a guide to measurement and estimation of the determinants of bilateral IIT shares from the perspective of new trade theory with multinational firms. We develop an analytically solvable general equilibrium model to investigate the impact of investment costs, multinational activities and income flows from repatriated profits. We also discuss and quantify the bias of the Grubel-Lloyd index associated with repatriated profit flows of multinationals. Using bias-corrected versions of the Grubel-Lloyd index as the dependent variable, we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in IIT shares.     

Optimal redistributive taxation with both extensive and intensive responses

We study optimal income taxation when labor supply reacts along the intensive and extensive margins. Individuals are heterogeneous across two unobserved dimensions: their skill and disutility of participation. We develop a new method to analytically derive conditions under which optimal marginal tax rates are non-negative everywhere. It is typically optimal to provide a distinct level of transfer to the non-employed and to workers with negligible earnings. Numerical simulations illustrate these properties for the US. We also apply our method to sign output distortions in other adverse selection frameworks with random participation, namely the monopoly nonlinear pricing and the regulatory monopoly problems.     

Extensive and intensive margins and exchange rate regimes

This paper studies the costs and benefits of fixed and flexible exchange rate regimes in the presence of endogenous intensive and extensive margins of trade. The net benefit depends on the levels and volatilities of those margins as well as on their correlation with consumers’ preferences. A fixed exchange rate regime is preferred for sufficiently high labour supply elasticities and lower love for product diversity. Delays between entry and production make fixed exchange rate regimes less attractive.     

Rigid labour markets with trade and capital mobility: theory and evidence

Abstract We develop a multi‐country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra‐industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced‐form regressions as well as simulation results of a calibrated general equilibrium model.     

Process tracing of extensive and intensive processes

ABSTRACT

This essay briefly analyzes the introduction of process tracing to the political science and political economy methodological toolkit. It then proposes a theory-guided variant of process tracing and distinguishes between its application in extensive and intensive type of processes. It argues that the comparative advantage of process tracing vis-à-vis other social sciences research methods lies in its potential to uncover the causal mechanisms that link the constitutive events of intensive type of processes. It shows that theory-guided process tracing of intensive processes can be successfully applied to illustrate, test and produce theory.     

North, South and distance in the gravity model

It is generally assumed that distance in the gravity model strictly reflects frictions impeding bilateral trade. However, distances North-South could also reflect differences in factor endowment that provide opportunities for profitable trade. This paper investigates the hypothesis that if we control for distance in the ordinary sense, differences North-South promote international trade. The hypothesis receives ample support. Moreover, the significance of differences North-South survives a battery of robustness tests, concerning period, distinctions between differences in latitude North-North, North-South and South-South, and controls for other measures of differences in factor endowment, such as differences in per capita output and differences in average temperature, rainfall, and seasonal range in temperature. The impact of differences North-South on bilateral trade has also been falling. This decline, in turn, might be partly responsible for the weakening of the influence of distance that has been occurring since World War II. This last hypothesis receives confirmation as well. Finally, the paper examines the impact of internal distance and remoteness on trade. Since both variables are country-specific, this is done by studying their impact on the country fixed effects themselves in the earlier estimates. Internal distance turns out to have a far greater impact than remoteness—by an order of 10.     

Welfare, home market effects, and horizontal foreign direct investment

Abstract.  We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we first fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we secondly show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low, when transport costs are high, and when products are close substitutes, the market outcome may well have to too many multinationals operating from a social point of view ('over-investment'). As a by-product, under-agglomeration of exporters in the larger market may arise.     

Dynamic gravity: endogenous country size and asset accumulation

Abstract Numerous gravity applications have resorted to panel data econometric techniques over the past decade. However, with the theory of gravity being so far only static, these estimations lack solid structural dynamic foundations. As a consequence, a consensus on a unified dynamic gravity estimation approach is yet to be reached. In this paper, (i) we build the theoretical foundations for a dynamic gravity model, (ii) we provide guidance for gravity‐type estimations with panel data and we consider applications, and (iii) we calibrate and simulate our model to compare its properties with those of the standard, static gravity setup.     

Trade costs and the timing of competition policy adoption

Abstract This paper first presents stylized evidence showing how the date of the adoption of competition policy is correlated with country size. Smaller countries tend to adopt competition policy later. We then present a theoretical model with countries of different size, trade costs, and firms competing à la Cournot. In the model we show that reduced trade costs following from increasing globalization affect countries differently depending on their size. This has implications for the incentives to introduce competition policy. The predictions of the model are consistent with the empirical regularity presented.     

Countries, regions and trade: On the welfare impacts of economic integration

We study the impact of falling international trade costs and falling national transport costs on the economic geography of countries involved in an integration process. Each country is formed by two regions between which labor is mobile, whereas there is no international mobility. Goods can be traded both nationally and internationally at positive, but different, costs. A decrease in trade costs and/or in transport costs has a direct impact on prices and wages, which allows us to account for the impact of changes in these parameters on the economic geography and welfare of each country. We show that, as trade barriers fall, the benefits of integration come after its costs. We also show that national transport policies are of the beggar-thy-neighbor type. On both counts, policy coordination is required in the process of economic integration.     

Agglomeration and fair wages

Abstract.  This paper implements a fair wage constraint into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. In the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential between skilled and unskilled labour, involving an increase in the unemployment rate of unskilled workers. In the long run, this mechanism renders full dispersion of an unstable equilibrium already at higher trade costs than in perfect labour markets. There is a tendency for fair wage preferences to enforce agglomeration.     

The Effect of Quotas on Domestic Product Price and Quality

A quota on foreign competition generally leads to quality upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese Voluntary Export Restraint (VER) in the U.S. auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare.I am grateful to Jim Gaisford, and Konrad Stahl, seminar participants at the Universität Mannheim and at the ZEW, and an anonymous referee for useful comments and suggestions. As Senior Fellow at the Center for European Integration Studies (ZEI), Bonn, I gratefully acknowledge its continued support.