TY - JOUR AU - Kasahara, Hiroyuki AU - Tang, Heiwai TI - Excessive Entry and Exit in Export Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 25878 PY - 2019 Y2 - May 2019 DO - 10.3386/w25878 UR - http://www.nber.org/papers/w25878 L1 - http://www.nber.org/papers/w25878.pdf N1 - Author contact info: Hiroyuki Kasahara University of British Columbia DEPARTMENT OF ECONOMICS 997 - 1873 EAST MALL VANCOUVER, BC V6T 1Z1 Canada Tel: 604-822-8624 Fax: 604-822-5915 E-Mail: hkasahar@mail.ubc.ca Heiwai Tang Johns Hopkins University 1740 Massachusetts Avenue, NW Washington, DC 20036 E-Mail: hwtang@jhu.edu M1 - published as Hiroyuki Kasahara, Heiwai Tang. "Excessive Entry and Exit in Export Markets," in Shin-ichi Fukuda, Takeo Hoshi, and Fukunari Kimura, organizers, "Globalization and Welfare Impacts of International Trade" Elsevier, Journal of the Japanese and International Economies (2020) M3 - presented at "27th NBER-TCER-CEPR Conference", July 27, 2018 AB - Using transaction-level data for all Chinese firms exporting between 2000 and 2006, we find that on average 78% of exporters to a country in a given year were new exporters. Among these new exporters, an average of 60% stopped serving the same country the following year. These rates are higher if the destination country is a market with which Chinese firms are less familiar. We build a simple two-period model with imperfect information, in which beliefs about their foreign demand are determined by learning from neighbors. In the model, a high variance of the prior distribution of foreign demand induces firms to enter new markets. This is because the profit function is convex in perceived foreign demand due to the option of exiting, which insures against the risk of low demand realization. We then use our micro data to empirically examine several model predictions, and find evidence to support the hypothesis that firms' high entry and exit rates are outcomes of their rational self-discovery of demand in an unfamiliar market. ER -