A Test of the Melitz-Ottaviano Model

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Endogenous Markups, Firm

Productivity and International Trade:

A Test of the Melitz-Ottaviano Model

Flora Bellone, Patrick Musso, Lionel Nesta (GREDEG-CNRS)

Frederic Warzynski

(Aarhus School of Business)

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Motivation

{ Long tradition in IO to estimate markups

{ Within the literature: Hall method (and refinements)

{ Limitations: rather macro literature, estimates average markups within industry

{ Here: try to capture some of the within- industry heterogeneity markup/pricing markup/pricing

behavior

behavior by adding firm-specific and time varying interactive variables

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Which firm specific variables?

{ TFP: in most IO models, efficiency differences translate into higher

markups

{ Export intensity: Exporters are different

{ Can pricing differences explain part of it?

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Motivation

{ Until recently: no theoretical model was flexible enough to allow markups to be firm-specific

{ Novelty of the Melitz-Ottaviano (MO) model

{ Suggests a few empirical relationships that we test

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What Does MO Predict?

{ At the firm-level, the MO model predicts that:

z 1) firm markups are negatively related to domestic market size;

z 2) markups are positively related to firm productivity;

z 3) markups are negatively related to import penetration

z 4) markups are positively related to firm export intensity and markups are higher on the export market than on the domestic ones

{ in the presence of trade barriers

{ and/or if competitors on the export market are less efficient than competitors on the domestic market.

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Methodology

{ Use a now standard method to estimate markups, based on Hall

(1986, 1988, 1990) and modified by Roeger (1995)

{ We also use a more recent and

structural methodology based on De Loecker and Warzynski (2008)

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Then add a few interactions with the RHS:

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Literature

{ Görg and Warzynski (2003): positive link between markups and exporting behavior

{ Konings, Van Cayseele & Warzynski (2005):

export intensity associated with higher markups

{ De Loecker and Warzynski (2008): look at Slovenia and find a similar effect of

exporting

{ Prices: Aw. Batra and Roberts (2001):

export prices lower than domestic prices

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Data

{ firm level dataset collected by the French Ministry of Industry (SESSI), the French Manufacturing Census (known as EAE)

{ constructed from a survey providing information on the financial statements and balance sheets of all

manufacturing firms with at least 20 employees

{ covers about 23,000 firms by year over the period from 1990 to 2004

{ represent only 25% of all manufacturing firms in France but account for 75% of employment and 80% of value added in French manufacturing

{ contains information about nominal gross output, a series of inputs (such as number of employees,

intermediates inputs, investments, etc.), and also exports.

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Results

{ Strategy:

z First look at the average evolution of the markup

z Second look at evolution of the distribution within sector

z Third try to understand markup

heterogeneity by adding some firm and sector specific interactive variables

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Results

{ Our result confirm the theoretical predictions of the MO model:

z Positive relationship with TFP

z Negative relationship with market size

z Positive relationship with exports

z Negative relationship with imports

z Also: countercyclical markups and small post-1992 effect

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Conclusion / Future Work (in progress)

{ Most empirical implications of the MO model were confirmed

{ Link between export and markup:

how to explain it?

{ Implications for productivity?