Excessive Entry and Exit in Export Markets / Hiroyuki Kasahara, Heiwai Tang.

Format:

Book

Author/Creator:

Kasahara, Hiroyuki.

Contributor:

National Bureau of Economic Research.

Tang, Heiwai.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25878.

NBER working paper series no. w25878

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

Using transaction-level data for all Chinese firms exporting between 2000 and 2006, we find that on average 78% of exporters to a country in a given year were new exporters. Among these new exporters, an average of 60% stopped serving the same country the following year. These rates are higher if the destination country is a market with which Chinese firms are less familiar. We build a simple two-period model with imperfect information, in which beliefs about their foreign demand are determined by learning from neighbors. In the model, a high variance of the prior distribution of foreign demand induces firms to enter new markets. This is because the profit function is convex in perceived foreign demand due to the option of exiting, which insures against the risk of low demand realization. We then use our micro data to empirically examine several model predictions, and find evidence to support the hypothesis that firms' high entry and exit rates are outcomes of their rational self-discovery of demand in an unfamiliar market.

Notes:

Print version record

May 2019.