The ABCs of Firm Heterogeneity: The Effects of Demand and Cost Differences on Exporting

Abstract

We develop a novel methodology for disentangling the demand and cost drivers of firm heterogeneity. Our specific focus is on export status differences, and we utilize a new data set containing firm-product information on prices and quantities sold in the domestic and each export market. Our methodology allows us to jointly estimate firm-level productivity and markups in every market while imposing no functional form restrictions on demand. We find that i) exporters have thicker domestic markets than non-exporters; ii) this advantage translates to foreign markets; and iii) while all firms face a trade-off between lowering costs and enhancing demands, export firms achieve demand increases with much less loss in productivity.