The project will model and study the dynamic behavior of exporting firms in a global economic environment. To this end, the project will make use of both theory and empirical data. First, it will extend the workhorse theoretical trade framework with firm heterogeneity. More precisely, it will model the demand that firms face and add tractable firm-level dynamics into that framework. Second, it will test the results of the theoretical model with well established facts on the dynamics of firm sales. Third, the project will study the sales of firms before and after trade liberalization episodes using detailed data on the sales of Brazilian exporting firms into individual destinations. Over the past decades, models that employ a constant elasticity "love for variety" demand have become an extremely useful tool in the theory of international trade. However, recent research has shown that these models cannot explain the large growth rates of goods and firms with little, but positive, trade before liberalization. This project will develop alternative demand formulations that have the desirable properties of the "love for variety" demand framework and are also able to tackle with its main quandaries. Moreover, the project will make use of rich datasets to look at the predictions of these new models. Objectives and intellectual merit: The aim of this project is to illuminate the behavior of exporting firms over time and after trade liberalization episodes. The grantee, together with his co-authors, aims to develop theoretical frameworks that model the demand side of the firm in a setting with firm-level dynamics. Previous theoretical results show the success of the theory in closely predicting trade flows of goods for the US-Mexico trade liberalization episode. Beyond prior theoretical work, the project has already taken steps on building a theoretical framework that accounts for a series of additional facts on the dynamics of sales of firms. Preliminary results show that the model with domestic productivity advances can account very well for the turnover and growth in the domestic market as well as for a large part of the observed turnover and growth into individual destinations. By using this modeling framework and Brazilian firm-level data on exporting sales by destination, the project will shed light to the behavior of exporters in trade liberalization episodes. Additionally, the project will develop a theoretical framework where exporters learn the foreign demand in order to study the implications of learning on dynamic exporting decisions. Broader Impact: The vast increase of trade flows over the past decades have put the public debate for global integration in the forefront. The findings of this project will be relevant to the evaluation of trade liberalization episodes in predicting which firms and sectors are mostly affected by these events. Given that firms having small sales tend to grow fast, predictions on their sales become critical for policy analysis.
