Symmetric and Asymmetric Trade with Heterogeneous Firms (CEIBS Working Paper, No. 010/2020/ECO)

We show that, independent of entry/exit a la Hopenhayn and market size expansion, trade with firm heterogeneity always crowds out less productive firms when countries are symmetric. When countries are asymmetric, however, trade can crowd in less productive firms and less productive firms almost always specialize in trade. We analyze how a country’s standing in the world determines whether and how these phenomena will arise. Our paper helps reconcile empirical findings that are contradictory to the existing theoretical literature, and highlights the importance of country heterogeneity in understanding trade with firm heterogeneity.