Timoshenko (2015) (Learning, prices, and firm dynamics)

The authors of this paper use firm level data on Portuguese manufacturing firms and documents two new novel facts about the joint evolution of firm performance and prices:

1. Within product categories, firms with longer tenure in export markets tend to export larger quantities at similar prices
2. Older or more experienced exporters tend to import more expensive inputs

The authors then write down a model that can match these facts

Model

Time is discrete, there are N countries. Each country is populated by a unit mass of infinitely lived consumers. There re two sectors in each economy: a final goods sector and an intermediate inputs sector. The final goods sector is populated by a mass of monopolistically competitive firms that each supply a differentiated variety of varying quality. The intermediate inputs sector is perfectly competitive and operates with a CRS production technology.

Consumers have log preferences over a CES aggregation of final goods. Within the CES aggregator final good has a multiplicative term representing the firm chosen quality of the good as well as a multiplicative preference shock term. This is idiosyncratic across firms.

TODO: DESCRIBE WHAT THE STRUCTURE IS.

intermediate sector

Perfect competition leads to price being equal to marginal cost

final goods

Static problem: choose good quality and quantity based on expected profits in each economy.

Entry problem: given result of static problem, firms choose each period which markets to enter. If they enter they pay a fixed cost per market.

For each market the firm serves, they observe the equilibrium price that cleared the market for their good. They invert this price to uncover what the demand shock was in that period. They use this demand shock as a noisy signal though which they update their beliefs about the distribution of demand shocks they face.

eqm

They show that this model can generate dynamics that match the two empirical facts from before.

Counterfactual

They also do a very brief counterfactual exercise where they consider the welfare implications of imposing a minimum quality standard on all exported goods. They find that this limit decreases welfare. The mechanism is as follows:

• quality standard raises productivity threshold for entry into export market
• The decline in number of exporters reduces competition in each market, raising prices
• Another effect is less foreign firms allows for more low efficiency domestic firms to enter

There is also an impact on the intensive margin:

• firms close to the productivity threshold (small or young) will face a binding quality constraint
• in order to export these firms must comply and in order to do so they need to pick which quality intermediate inputs.
• higher quality inputs requires more labor
• This leads in a reallocation of resources among exporters toward young and small firms.

TODO FILL THIS IN!!!