Download

This paper offers a unified explanation for two puzzles in international trade: the limited participation of developing countries in international trade and the negative correlation between firm-level sales volatility and exports. By extending the standard heterogeneous firm trade model with variable price-demand elasticity and exporter dynamics, the "Oi-Hartman-Abel" effect present in standard models reverses; profit reductions during downturns outweigh boom-time gains. This causes firms in volatile economies to be discouraged from exporting and expanding into foreign markets. Consequently, volatility reduces aggregate exports and total income, explaining nearly two-thirds of the unexplained export differences across development levels and 75% of the observed relationship between firm-level sales volatility and exports.

Download

Using a new time-varying measure of real exchange rate uncertainty, I find a negative relation between real exchange rate uncertainty and international trade at the aggregate level. Then, using Colombian firm-level data, I document 3 firm-level facts consistent with a precautionary margin in international trade. When real exchange rate uncertainty increases, exporters 1) reduce their export intensity, 2) are more likely to stop exporting, and 3) are less likely to start exporting to new markets. Additionally, I find that this behavior is mostly explained by those exporters paying higher interest rates and facing higher shipping lags. These results contrast with the predictions from standard international trade sunk cost models. Consequently, these models will underestimate the effects of real exchange uncertainty on international trade flows. I incorporate firm-level debt default and international shipping lag into a standard dynamic trade model to overcome this issue. In the new model, an increase in the real exchange rate uncertainty increases the probability that exporters end up financially vulnerable. To hedge against this risk, exporters respond by increasing mark-ups or quitting the export market, generating a drop in aggregate exports through both the intensive and the extensive margin of trade. Once this extension is calibrated to match firm-level Colombian data, it predicts that a one standard deviation increase in the real exchange rate uncertainty generates a drop in total exports of around 6%.

[Available upon request]

How does international trade affect the wage distribution across workers? We use detailed employer-employee covering 1987 to 2004 to answer this question. Using a new instrumental variable approach to disentangle the effects that trade openness has over the distribution of income and wages, we document that an increase in local trade exposure reduces wage inequality. Furthermore, we show that this result is associated with changes happening at the within-industry and within-firm levels. These changes lead to increases in the relative demand for low-wage and low-skill type of worker. At the within-industry level, we show that trade openness reallocates workers towards small firms and low-skilled jobs. At the within-firm level, we find that small firms increase their labor intensity and the average amount of workers, while larger firms reduce it in response to changes in trade openness. We argue that these firm-level responses are the root of the increase in the relative demand for low-wage workers.

Most of the studies on exporter's pricing behavior focus on discrimination across markets. Less attention has been paid to how firms price discriminate across their portfolio of customers. Using novel firm-to-firm transaction level data from Colombian exports, we document three facts. First, price dispersion at the seller-product level is non-negligible and a large fraction of it is accounted for by within destination variation. Second, clients with larger shares in the exporters' past revenues pay lower prices and their prices are adjusted more frequently. Third, prices paid by the largest clients are less sensitive to fluctuations in the exchange rate, especially when the currency appreciates. These results illustrate that firms actively price discriminate across their buyers and offer more favorable terms to their largest clients. We rationalize these facts with a model of heterogeneous buyers and sellers, costly search, random matching and menu costs.