Essays on firm responses to price volatility and international specialization

Chapter 1 of this thesis examines in theory and empirics how exporters use different modes of transportation to hedge price uncertainty. Ocean transportation in international trade imposes a time lag between the departure and arrival of a shipment. This arrival lag creates a problem for firms selling in markets with volatile demand. Specifically, the quantity a firm ships via ocean at a given time may not maximize profits when it arrives. This chapter examines whether fast but expensive transportation hedges this uncertainty. Fast air shipments allow a firm to wait until the uncertainty is revealed, meaning that high demand volatility urges greater air shipments. On the other hand, a higher price for air shipment raises the cost of waiting and causes a firm to choose greater ocean quantities to minimize the transport bill. The model in this paper identifies the tradeoff between uncertainty and transportation costs. Monthly data for US imports of merchandise separated by transport mode confirm the predictions. Chapter 2 provides direct evidence for the factor proportions theory. We show that in the setting of multiple goods and factors, the factor proportions theory has the following prediction: across industries, the impacts of the endowment of a given factor on industry outputs have positive co-variance with the relative uses of this factor. The intuition is that on average, the industries that use a given factor heavily have positive output responses following an increase in the endowment of this factor. This co-variation condition is robust to Hicks-neutral and factor-augmenting productivity differences and constitutes a direct test of the production side of the factor proportions theory. We also show that the co-variation condition finds empirical support