Recent empirical research using micro level trade data has established substantial difference between exporting and non exporting firms with respect to many performance characteristics. In their seminal work Bernard and Jensen (1999 JIE) document that exporters operate at a larger scale, are more productive, pay higher wages, and use more capital per worker. In theoretical literature, on the other hand, recent models of firm heterogeneity have been successful in explaining most of these differences between exporters and non exporters.
In particular, these models address the observed differences in productivity levels and size (Melitz, 2003, Bernard et al, 2003), skill intensity and wage premium (Yeaple, 2005) and innovation activities (Atkeson and Burstein, 2007), and the importance of these differences for the effect of trade liberalization on aggregate productivity. However, none of the existing theoretical models of firmshself selection into export markets can rationalize higher capital intensity of exporters and explain within industry heterogeneity in factorshproportions.
This paper proposes a model which incorporates heterogeneity in capital intensities across firms to analyze the implications of this heterogeneity for trade policy outcomes and aggregate economic variables. The theoretical model builds on Melitz (2003) general equilibrium model with heterogeneous firms and product differentiation, and introduce two additional features, backed up by empirical evidence. First, we introduce into the model a well known empirical regularity that large and more productive firms pay lower interest rates on long term loans than small firms.
As such, this paper assumes that capital price is firm specific and depends on repayment probability. Since more productive firms are less likely to receive a ideath shockjand to exit the market than less productive firms, the former ones are more likely to repay loans used to finance capital purchases. Therefore, the likelihood of loan repayment is increasing in productivity and creditors will include a risk premium into capital price for low productivity firms.
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A Model of Trade Liberalization and Technology Adoption with Heterogeneous Firms
