This dissertation considers firms' optimal behavior while participating in international trade when firms are ex ante heterogeneous in terms of their productivity. The first chapter explains why a representative firm assumption cannot explain most of the observations we see in the data related to exporting firms and non-exporting firms. Moreover, this chapter explains the mechanism of why the theory needs a heterogeneous firm assumption to explain the observed facts.
The second chapter deals with the interaction between income differences across countries and international trade patterns. Income is not equally distributed among countries and this chapter analyzes the effect of this unequal distribution on bilateral trade patterns in an environment with heterogeneous firms. The second chapter develops a framework in which countries, depending on their income, potentially demand different sets of varieties as well as different quantities for a given variety using non-homothetic preferences which is in contrast to the standard framework with homothetic preferences. A quantitative comparison between the framework proposed in this chapter and a standard framework shows that they predict similar trade patterns even with different estimated inputs for the variable trade barriers, implying that when rich countries export, income differences with the trading partner in my framework play a similar role as additional trade barriers in the standard framework. Finally, this chapter analyzes the impact of high growth of poor countries. As poor countries grow, the trade barriers they face fall. As a consequence, the increase in the growth of world trade in the non-homothetic model will be higher than the predicted counterpart in the standard model.
The third chapter analyzes asymmetric information and impacts of this on the decisions of importers and exporters engaged in international trade. This chapter incorporates learning and reputation building into a simple stochastic dynamic model of trade and studies two bilateral trade flows influenced significantly by learning and reputation, namely United States imports of Japanese and French cars over the period 1961-2005. This chapter finds that since learning and reputation building require time, predicted short run trade patterns can be quite different than those predicted in the long run.