The Intensive Margin in Trade: Moving Beyond Pareto
The Melitz model with Pareto-distributed firm productivity has become a tractable benchmark in international trade. It predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners will occur on the extensive margin (the number of firms exporting). In the World Bank’s Exporter Dynamics Database on firm-level exports from 50 countries, however, we find that half of the variation in exports occurs on the intensive margin (exports per exporting firm). The importance of the intensive margin rises steadily when going from the smallest to largest exporting firms. Combining Melitz with lognormally-distributed firm productivity and firm-destination fixed trade costs can explain the intensive margin seen in the EDD data.