Decomposing firm-level sales variation

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.