Consequences of Trade Openness on Firm-level Decisions and Implications for Volatility and Wage Inequality
Open Access
- Author:
- Riano, Alejandro
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- July 17, 2009
- Committee Members:
- James R. Tybout, Dissertation Advisor/Co-Advisor
James R. Tybout, Committee Chair/Co-Chair
Andres Rodriguez Clare, Committee Member
Ruilin Zhou, Committee Member
Mark Sebastian Anner, Committee Member
Vijay Krishna, Committee Member - Keywords:
- International trade
wage inequality
volatility - Abstract:
- This dissertation develops dynamic stochastic models of heterogeneous firms in small open economies and uses them to analyze how firms' decisions are shaped by their participation in export markets and to understand the implications that these decisions have for firm-level volatility and the behavior of wage inequality in developing countries. Chapter 1 presents a brief description of the issues discussed in the following two chapters. Chapter 2 seeks to find whether exporting helps to reduce a firm's sales volatility by means of diversifying aggregate shocks in its domestic market in an economy with no capital markets and in which exporting is costly. This is a partial equilibrium model with monopolistically-competitive, risk-averse firms that are heterogeneous with respect to their productivity, capital stock and exporting status and that face idiosyncratic as well as aggregate uncertainty. Firms become exporters primarily because of the positive impact to mean profits, even if it means experiencing higher volatility of sales. However, firms take advantage of the possibilities to diversify their revenues, as firms are more likely to become exporters when the correlation between domestic and external aggregate shocks is low and when risk aversion is high. Chapter 3 builds a dynamic stochastic general equilibrium model of industry evolution for a small open economy in order to understand the link between trade liberalization, technology adoption and wage inequality. Monopolistically-competitive firms use skilled and unskilled labor, decide whether to export or not, and choose what technology to operate. The technology that a firm employs determines the stochastic process for skilled labor productivity, so that larger, more productive firms tend to be more skill-intensive, as observed in the data. The model is estimated using a Simulated Method of Moments estimator, and fitted to plant-level data from the Mexican manufacturing sector after the trade liberalization of 1985. The estimates of the structural model suggest that the skill-biased technology adoption spurred by a unilateral trade liberalization of the magnitude observed in Mexico would result in an increase in the skill premium of about 4.2 percentage points in steady state.