Decomposing firm-level sales variation

• Published in: Journal of economic behavior & organization Vol. 106; pp. 317 - 334
• Main Authors: Munch, Jakob R., Nguyen, Daniel X.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.10.2014; Elsevier Sequoia S.A
• Subjects: Demand; Demand shock; Economic models; Economic theory; Exports; Firm heterogeneity; Firm-level export data; International trade; Productivity; Products; Sales; Studies; Trade; Truncation correction; Firm-level export data; Truncation correction; C24; F12; Firm heterogeneity
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2014.06.012

•We show how firm-level sales can be decomposed into a firm component and a firm–destination component.•The firm–destination component captures demand shocks or firm–destination specific cost shocks.•We use a highly detailed dataset comprising firm–product–destination-specific exports for the population of Danish manufacturing firms.•We correct for truncation using a Bayesian MCMC estimator. Truncation issues arise because not all firms export to all markets.•We find that sales variation is primarily explained by firm–destination-specific heterogeneity for the majority of products. Recently, much of the trade literature has been focused on using firm-specific productivity to explain export heterogeneity. This study provides evidence for the importance of incorporating firm–destination-specific effects such as demand shocks in theories of exporter heterogeneity. Our study estimates the proportion of firm-level sales variation within a product–destination market that can be explained by firm-specific effects such as productivity. We use a highly detailed dataset comprising firm–product–destination-specific exports and correct for truncation as modeled by recent trade theories. We find that the contribution of firm-specific effects varies greatly across products and that it is 45% for the median product. That is, within-destination sales variation is primarily explained by firm–destination-specific heterogeneity for the majority of products.