The impact of entry costs on export market participation in agriculture

Abstract

Theoretical models of market entry imply that sunk costs are an important factor in the decision to export. Following Helpman, Melitz, and Rubinstein (2008), we develop a simple model of foreign market participation and use a Bayesian method to estimate the resulting dynamic discrete-choice model with lagged dependent variable. Employing a balanced panel data that follows 81 trading partners for 30 years from 1971 to 2000, we estimate our model and compute the marginal effect of sunk costs on the likelihood of export market participation. We find that such costs are economically and statistically important for trade in all of the six major agricultural commodities (Cereals, Dairy, Fish, Meat, Vegetables and Fruits, and Sugar), for agricultural producers in both developed and developing countries. We also find evidence suggesting that, in general, market access for both developed and developing exporters had improved in the years following the Uruguay round of trade negotiations (1995–2000).