Assessing Productivity Gains from International Trade in a Small Open Economy

  • Umut Kılınç
Research Article


Empirical evidence suggests that exporter firms tend to charge higher markups than non-exporters due to trade barriers. The exporters’ markup premium, however, may disappear in a special case, namely when the home country is small relative to its trade partners and trade barriers are low. This can be because competition is more intense in the large export destination than in the small home country, so that firms are able to set higher markups for locally sold products but not for exports. This paper provides empirical evidence on the validity of this special case by estimating markups for firms in Luxembourg who generally export to larger countries. The estimated negative markup premium for exporters has important implications for the productivity measurement. In a sufficiently small open economy, exporters’ productivity may be biased downward, when the firm-level markup variation is not controlled for in the productivity estimation. The bias in the productivity estimates further leads to the inaccurate conclusion that openness to international trade lowers allocative efficiency.


Export Markup Productivity Micro data Allocatvie efficiency 

JEL Classification

L11 L16 F14 F43 D24 



This work is done as a part of a research project co-funded by the Marie Skłodowska-Curie actions and the FNR, Luxembourg. This work is independent of the STATEC and all errors are mine. I would like to thank to two anonymous referees, the participants of the STATEC’s internal seminar and the Society for Economic Measurement 2017 Conference for valuable discussions and suggestions.


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Authors and Affiliations

  1. 1.Institut National de la Statistique et des Études Économiques du Grand-Duché du Luxembourg (STATEC)LuxembourgLuxembourg

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