Multi-Product Firms and Trade Liberalization
This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during trade liberalization. Firm productivity in a given product is modeled as a combination of firm-level "ability" and firm-product-level "expertise", both of which are stochastic and unknown prior to the firm's payment of a sunk cost of entry. Higher firm-level ability raises a firm's productivity across all products, which induces a positive correlation between a firm's intensive (output per product) and extensive (number of products) margins. Trade liberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shed marginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce a smaller range of products after liberalization, they increase the share of products sold abroad as well as exports per product. All of these adjustments are shown to be relatively more pronounced in countries' comparative advantage industries.
Bernard and Schott thank the National Science Foundation (SES-0241474 and SES-0550190) and Redding thanks Princeton University and the Centre for Economic Performance (CEP) for research support. We thank Jonathan Eaton, Gordon Hanson, Marc Melitz, Guy Michaels, Peter Neary, Henry Overman, Esteban Rossi-Hansberg and seminar participants at the NBER, LSE, Penn State, University of Pennsylvania, University of British Columbia, UC Davis and UC San Diego for helpful comments and discussion. The research in this paper was conducted while Bernard and Schott were Special Sworn Status researchers of the U.S. Census Bureau at the Boston and New York Research Data Centers. Research results and conclusions expressed are those of the authors and do not necessarily reflect the views of the Census Bureau, the NBER, or any other institution to which the authors are affiliated. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Bernard, Andrew, Stephen Redding and Peter K. Schott. "Multi-Product Firms and Trade Liberalization." The Quarterly Journal of Economics (2011) 126 (3): 1271-1318. citation courtesy of