Importing, Uncertainty, and the Costs of Trade
Graciano, Tim A.
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Costs of international trade are increasingly modeled as fixed costs paid by individual firms. In a dynamic setting, these fixed costs may take two different forms: costs of starting to trade and costs of continuing to trade. The distinction matters when firms experience idiosyncratic shocks to productivity over time. We develop an analytically tractable dynamic model of firms' import decisions. In the model, there are costs of developing relationships with foreign input suppliers and costs of continuing these relationships. The benefit of using imported inputs lies in a combination of the relative price and the technology embodied in the inputs. Our model quantitatively captures many important features of plant-level manufacturing data, including the dynamics of import status, entry and exit rates, the size distribution, and the large performance advantage associated with using imported intermediate inputs.