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Yuanzhe TANG (CREST) “Trade policy uncertainty, learning and export decision”

September 28, 12:15 pm - 1:15 pm

Time: 12:15pm – 13:15 pm
Date: 28 th of September  2020

Yuanzhe TANG  (CREST) “Trade policy uncertainty, learning and export decision

Abstract : Recent years have seen an increase in trade policy uncertainty (TPU). Conventional wisdom is that TPU deters firms’ entry into export markets. However, US exports relative to GDP have grown by 17 percent since early 2016 despite dramatically rising TPU. In this paper, I study a firm’s decision to start exporting under TPU in the presence of demand learning that can well explain how new exporter dynamics differ from old ones’, in line with empirical evidence. The goal is to verify if the result such that TPU reduces entry is robust in settings where export decision is also affected by demand learning. I first examine the effect of TPU and learning in a sunk costs model. I also consider an environment without sunk costs but with per period fixed cost. I find that TPU can stimulate entry in some circumstances. The intuitive option value of waiting generated by a possible low tariff state in the future can be compensated by extra benefits of learning due to early entry and the convexity of the profit function. Using a mean-preserving spread, as potential high and low tariff diverge far enough from the current medium tariff and the variance of post-entry belief is large, it is more likely that TPU will encourage a firm’s entry. The impact of the variance of post-entry belief on entry threshold under TPU also sheds light on how incumbents’ export decisions can be affected by TPU as exporting age varies.

Details

Date:
September 28
Time:
12:15 pm - 1:15 pm
Event Categories:
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Organizers

Edouard CHALLE
Julien PRAT