Non Parametric Gravity: Quantifying Firm Heterogeneity and Measuring Its Macroeconomic Implications

The international trade field has been transformed by the study of individual firms. The correlation between observable firm attributes, such as firm productivity, and international trade performance led to a reevaluation of international trade framework and a vivid debate about the importance of firm heterogeneity for various macroeconomic outcomes, such as the gains from trade and the trade growth after a trade liberalization. This project constitutes a major endeavor to quantify firm heterogeneity and measure its macroeconomic implications. It envisions developing a theoretical and empirical framework in order to answer three key questions at the center of the analysis of firm performance in international trade and its macroeconomic impact. How does firm heterogeneity affect the predictions of trade models for the removal of trade barriers? How can one estimate the importance of various sources of firm heterogeneity in order to improve the model predictions? Finally, how can these estimates used to provide a more credible evaluation of the model's policy implications? Ultimately the project will improve the credibility of quantitative models used for policy evaluations related to trade to trade cost changes.

The project will explore firm heterogeneity in trade and on estimation of trade models. The research will incorporate nonparametric and semiparametric estimation tools developed in the fields of Econometrics and Industrial Organization in order to relax the restrictive parametric forms that quantitative trade models have imposed on the distribution of firm fundamentals. The research builds on three projects. The first project uses developed tools to improve the credibility of quantitative models used for policy evaluations by allowing them to capture non-linear elasticities of firm-level exports at the sector-level. The second project will combine micro-data on the individual behavior of firms with the baseline framework to quantify additional margins through which firm heterogeneity can affect aggregate outcomes and estimate individual firm demand. The project will ultimately develop new applied general equilibrium models that incorporate firm heterogeneity which can be used for predictions of trade policy going forward.