GEP 17/15: Twin peaks

Summary

A large number of empirical studies since the mid-1990s have established three key empirical regularities about the export behaviour of individual firms:

1. Only a minority of producers export
2. Exporters are 'better' than domestic firms in a wide range of performance measures
3. Most exporters sell the majority of their output domestically

While the first two results have been verified in many countries, the third is based on studies that use firm-level data from only Colombia, France and the US. In this paper, the authors show that the distribution of export intensity varies considerably across countries, displaying 'twin peaks' - a bimodal distribution in which the mass is concentrated close to both extremes - in many of them.

The authors show that, with only a simple adjustment, an otherwise standard model of international trade with heterogeneous firms can reproduce the new stylized fact outlined above. The key ingredient is that firms not only differ in their productivity but also in terms of the demand they face domestically and abroad. When the profitability of firms across different markets is sufficiently large, the distribution of export intensity exhibits twin peaks. Under these circumstances, the authors show that the distribution of export intensity is bimodal, with modes near 0 and 1, and the 'height' of each mode is determined by a country's size. Thus, in countries that are relatively large compared to their trade partners, most exporters will sell the majority of output domestically. In relatively small countries, high-intensity exporters are prevalent, and intermediate-size countries have twin peaks. The authors show that, indeed, differences in relative market size explain most of the observed variation in the distribution of export intensity across the world.

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Authors

Fabrice Defever and Alejandro Riano

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