Heterogeneous Firms in International Trade

Abstract

This dissertation consists of three chapters exploring how producer heterogeneity and international trade interact.

Chapter 1 proposes a new method to solving a class of complex discrete choice problems with agent heterogeneity. While this class of discrete choice problems have many applications in international trade, the chapter takes the firm's plant location problem as its leading example. It then shows how to solve for the policy function of the problem, which maps heterogeneous firm types in the optimal plant location strategy for a firm of that specific type. The chapter concludes with an exposition of several other discrete choice problems examined by the literature to which the policy function method is applicable.

Chapter 2, written with Kathleen Hu, builds a quantitative spatial model to investigate corporate tax equalization in the European Union. Though member states set their rates independently, an EU-wide policy has become a recent topic of political discussion. Since profits of EU-based firms are taxed in the production location, current tax rate variation could create firm-level incentives to open facilities in low tax countries. These would be eliminated in a tax rate equalization. The model is estimated and used to perform a counterfactual experiment where tax rates are harmonized, operationalizing the policy function method from the previous chapter. The counterfactual predicts substantial redistribution within the EU, in particular industrial activity being relocated from currently low-tax to high-tax countries.

Chapter 3 investigates the impact of import liberalization policy in Brazil, uncovering differential establishment-level outcomes dependent on initial employment level. Large establishments were more likely to survive than their smaller counterparts. Conditional on survival, they were less likely to shrink than similar small establishments. These patterns hold in both traded and nontraded industries, with industrial composition shifting as labor is systematically reallocated from small to large establishments. Finally, the chapter shows that the standard heterogeneous trade model naturally extended to incorporate a nontraded sector cannot replicate these nontraded sector patterns. A model featuring both final and intermediate input demand for nontraded varieties is proposed and qualitatively consistent with the empirical patterns.