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Firm Experimentation in New Markets

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Executive Summary

An important feature of the data on new exporters is the evolution over time of their export size and exit rate. As the exporting age of firms increases, their average export volumes grow and the exit rate decreases. In particular, the author observes cases of new exporters expanding slowly initially, and switching to high levels of exports after some time. The author proposes a quantitative model of active learning that can explain these patterns. In the presence of demand uncertainty and high sunk costs of entry, the firm can postpone paying this cost and learn more about its demand by paying for the testing technology.

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