Export Decision under Risk

                                                              
José De Sousa presented “Export Decision under Risk“, co-authored with Anne-Célia Disdier and Carl Gaigné, at UC Davis ‘s seminar on April 6, as well as at CID Seminar Series in Harvard Kennedy School on March 21.
Abstract:
In firm-based trade theory, consumer expenditure in foreign markets is typically assumed to be known with certainty. Firms’ surveys suggest however that expenditure uncertainty is a top business driver and little is known about how firms deal with this uncertainty in foreign markets. A simple heterogeneous-firms trade model with risk-averse managers shows that on average firm-level exports decrease with uncertainty. However, uncertainty also impacts endogenously the number of exporters and the industry supply in a destination. As a consequence, firm’s responses to uncertainty are heterogeneous: on average, the most productive firms sell more than the least productive ones, but this difference shrinks with uncertainty. These predictions are put to the test by using French firm-level exports across destinations and sectors with different levels of expenditure volatility. Results are consistent with our theoretical predictions and confirm that expenditure volatility acts as an equalizer between firms