Revise and resubmit, Quarterly Journal of Economics
Abstract: Much of the variation in international trade volume is driven by firms’ extensive margin decisions to participate in export markets. To understand these decisions and predict the sensitivity of export flows to changes in trade costs, we estimate a standard model of firms’ export participation. In choosing whether to export, firms weigh the fixed costs of exporting against the forecasted profits from serving a foreign market. We show that the estimated parameters and counterfactual predictions from the model depend heavily on how the researcher specifies firms’ expectations over these profits. In response, we adopt a moment inequality approach, placing weaker assumptions on firms’ expectations. We use data from Chilean exporters to show that, relative to methods that require specifying firms’ information sets, our approach finds fixed export costs that are 80-90% smaller, leading to distinct predictions under counterfactual export promotion policies. Finally, we test whether firms differ in the information they have about foreign markets. We find that larger firms possess better knowledge of market conditions in foreign countries, even when those firms have not exported in the past.