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Excessive Entry and Exit in Export Markets

Hiroyuki Kasahara, Heiwai Tang

Chapter in NBER book Globalization and Welfare Impacts of International Trade (2019), Shin-ichi Fukuda, Takeo Hoshi, and Fukunari Kimura, organizers
Conference held July 27, 2018
Published in October 2019 by Elsevier, Journal of the Japanese and International Economies

Using transaction-level data for all Chinese firms exporting between 2000 and 2006, we find that on average 78% of exporters to a country in a given year are new exporters. Among these new exporters, an average of 60% stopped serving the same country the following year. These rates are higher if the destination country is a market with which Chinese firms are less familiar. We build a simple two-period model with imperfect information, in which beliefs about their foreign demand are determined by learning from neighbors. In the model, a high variance of the prior distribution of foreign demand induces firms to enter new markets. This is because the profit function is convex in perceived foreign demand due to the option of exiting, which insures against the risk of low demand realization. We then use our micro data to empirically examine several model predictions, and find evidence to support the hypothesis that firms’ high entries and exits are outcomes of their rational self-discovery of demand in an unfamiliar market.

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Document Object Identifier (DOI): https://doi.org/10.1016/j.jjie.2019.101031

This chapter first appeared as NBER working paper w25878, Excessive Entry and Exit in Export Markets, Hiroyuki Kasahara, Heiwai Tang
 
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