1: Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics (Job Market Paper)
Abstract: Empirical work on export dynamics has generally assumed constant marginal production cost and therefore ignored domestic product market conditions. However, recent studies have documented a negative correlation between firms' domestic and export sales growth, which suggests that firms are capacity constrained in the short run and face increasing marginal production cost. This paper goes beyond the current literature by developing and estimating a dynamic model of export behavior with capacity constraints and endogenous investment. The model has implications that differ from earlier models that assume constant marginal costs in several respects: (1) in the short run, exporters face trade-off between domestic and export sales. Firms' export sales growth led by positive foreign demand shocks causes a rise in output price and induces welfare losses for domestic consumers. (2): the long-run responses differ from the short-run responses, as firms can adjust their production capacity through capital investment over time.
Using a simulated method of moments approach, I fit the model to plant-level data for Colombian manufacturing industries. The estimated model is used to simulate how the economy transitions in response to an exchange-rate devaluation. The results show that incorporating capital adjustment costs is empirically important. First, it takes more than five years for firms to fully adjust to a permanent change of the exchange-rate process that depreciates the steady state value of the peso by 20%. Second, the long-run and short-run export responses differ: the long-run exchange rate elasticity of exports is 3.46, compared with 2.63 in the short run. Finally, firms' expectation on the duration of the policy changes also matters. The failure to accurately anticipate the duration of the devaluation results in reduction in firms' profits due to over- or under- investment in capital.
2: Factor Adjustment Costs and New Exporter Growth
Abstract: Standard dynamic exporting models with sunk export entry costs (Baldwin and Krugman, 1989; Das et al, 2007) explain firms' foreign market entry and exit behavior, but not their patterns of export growth. In particular, they do not explain why new exporters gradually increase their export sales as they mature in the export market.
This paper explores the possibility that new exporters' age-dependent export growth is an optimal response to factor adjustment costs. In the presence of factor adjustment costs, firms respond more slowly to market shocks. As a result, new exporters increase their export sales gradually rather than adjusting fully upon export entry.
I construct a model of dynamic exporting where firms face both factor adjustment costs and sunk export entry cost. Using Colombian data at the plant level from 1981-1991, I estimate the parameters of the model using the simulated method of moments. I find that a model with adjustment costs does a good job of replicating new exporters' pattern of gradual growth. Without adjustment costs, the estimate of sunk export market entry cost is more than 10 times larger.