Firm exit, technological progress and trade

The dynamics of export market exit and firm closure have found limited attention in the new heterogeneous-firms trade literature. In fact, several of the predictions on firm survival and exit stemming from this new class of models are at odds with the stylized facts. Empirically, higher productivity firms survive longer, most firm closures are young firms, higher productivity exporters are more likely to continue to export compared to less productive exporters and market exits as well as firm closures are typically preceded by periods of contracting market shares. The present paper shows that the simple inclusion of exogenous economy wide technological progress into the standard Melitz (2003) model generates a tractable dynamic framework that generates endogenous exit decisions of firms in line with the stylized facts. Furthermore, we derive the effects of faster technological progress and trade liberalization on export market exit and firm closure.

► We model a dynamic heterogeneous-firms-trade model extending Melitz (2003). ► Exit of firms is driven by technological progress for new firms (vintage capital). ► The exit and survival patterns of the model trace empirical stylized facts. ► Faster technological progress softens the selection mechanism at entry. ► Full analytical tractability (including closed form solutions) is maintained.