CAPITAL AND LABOR DISTORTIONS, FIRMS' HETEROGENEITY AND EXPORT BEHAVIOR

A firm-level input price distortion is integrated into a firm’s market selection decision model. We conclude that a firm facing more capital and labor costs, as measured by input price wedges at the firm level, is more likely to export and have a higher export intensity. The assumption is that the domestic market in China is more competitive for manufacturing sectors. Moreover, my model suggests that firm-level input price wedges have less of an effect on firms with higher productivity. Empirically, I show that total factor productivity for exporting firms is lower than that for firms that only sell domestically. I use two-stage Heckman regressions to verify empirically my theoretical model. I also find that the distortions have greater impact on non-State-Owned Enterprises, and the results remain consistent in export-oriented cities in which firms are heavily subsidized for exports, and in sectors who have a relatively high ratio of China to United States prices