DP6545 Country Size, Productivity and Trade Share Convergence: An Analysis of Heterogenous Firms and Country Size Dependent Beachhead Costs
This paper modifies the heterogenous firms and trade model by Melitz (2003) by explicitly modelling the entry cost of a firm in a new market as a function of market size. This leads to several new predictions compared to the standard model: The productivity of non exporters and exporters depends on market size. Moreover, manufacturing export shares vary inversely with country size. However, export shares converge (upwards) as markets are integrated. The empirical part of the paper offers support for our model specification.