Convexities , Nonconvexities , and Firm Export Behavior ∗

Models of heterogenous firms making decisions about entering foreign markets in the face of sunk entry costs have become standard tools for understanding the firm exporting decision. These models induce a discrete choice between exporting and only serving the domestic market. In this paper we study how well these discrete choice models account for the data on new export entrants. We document the employment responses of Colombian plants that enter the export market and find that, though there is a discrete nature to employment adjustment and exports, there is also a substantial amount of adjustment that continues after entry, which is contrary to a standard model with frictionless markets. We construct a dynamic discrete choice model of exporting that includes costs of adjusting labor inputs. We use simulation based methods to structurally estimate the parameters of the model and find that convex costs of labor adjustment are crucial for replicating the observed patterns of adjustment in the data. Our estimations also recover values for the entry costs that exporters face, adding to the small amount of evidence on the scale of these costs. The estimates of export entry costs increase by 21 percent when adjustment frictions are not accounted for, suggesting that entry cost estimates are sensitive to the model environment. ∗We would like to thank Mark Roberts and Jim Tybout for allowing us access to the data used here. This work was undertaken with the support of the National Science Foundation under grant SES-0536970. †University of Texas at Austin, ruhl@eco.utexas.edu ‡Federal Reserve Bank of Kansas City, jonathan.willis@kc.frb.org