Firm heterogeneity and costly trade: A new estimation strategy and policy experiments

The parameters of the model are estimated using cross sectional customs data on Bangladeshi exports of apparel to the US and EU. Counterfactual experiments regarding the effects of reducing costs, both fixed and marginal, or of trade preferences (with distortionary Rules of Origin) offered by an importing country are performed. The counterfactuals show that reducing fixed costs at various levels has very different effects and suggest that such reductions are more effective in promoting exports when applied at later stages when firms are more committed to production. A subsidy of 1.5 million dollars to industry entry costs raises exports by only 40 cents for every dollar spent, but when applied to fixed costs of production, it raises exports by $25 per dollar spent.