Demand uncertainty in international trade

The prevailing models in current international trade use productivity/cost heterogeneity models to motivate differences among firms that export. In this thesis, I present two papers that challenge the view that productivity/cost heterogeneity is the primary driver of firm heterogeneity. The first paper presents a constellation of facts that are hard to reconcile with productivity heterogeneity models: the existence of trade failures, the short duration of trade, the variance of export intensity, the weak correlation between domestic and export rank orders, and the presence of export-only firms. It then introduces a general equilibrium model of firm heterogeneity that reconciles these facts by eschewing the traditional cost-heterogeneity mechanism for one that focuses on the demand side. In the model, firms face uncertain destination-specific demands that are realized after they enter the market. Firms drawing high demands succeed and stay. Those drawing low demands fail and exit. Realized demand in a tested market is used to forecast unknown demand in an untested market. The second paper decomposes the destination-specific sales of Danish firms into its firm-specific and firm-destination specific components. Since productivity is firm specific, the paper estimates an upper bound of the proportion of sales variation explained by productivity. When controlling for self selection into markets, we find that productivity variation can only explain approximately fifteen percent of market sales variation on average. A firm-destination mechanism such as demand heterogeneity such as that proposed by the first paper can resolve the discrepancy