Endogenous Markups Firm Productivity and International Trade Testing Some Micro Level Implications of the Melitz Ottaviano Model 1 Flora Bellone
In this paper, we test key micro level theoretical predictions of Melitz and Ottaviano (MO) (2008) a model of international trade with heterogenous firms and endogenous mark ups. As implied by the model, we find that, all else equal: 1) firm markups are positively related to firm productivity; 2) firm markups are negatively related to domestic market size; 3) firm markups are negatively related to bilateral trade liberalization (through import penetration) 4) firm markups are positively related to firm export intensity. We interpret this result as indicative that, behind productivity heterogeneity, quality differentiation across firm may explain why exporting firm are able to charge higher mark ups on export markets compared to the domestic market despite freight cost absorption. This result points out to the need to augment theoretical models in the line of Melitz and Ottavianno (2008) with quality differentiation across firms and across markets in order to tackle appropriately mark ups patterns at the firm level.