Uncertainty and Export Status: Theory and Evidence

I develop and analyze a model of uncertainty and international trade in which firms can allocate output across markets in response to market-specific shock realizations. The model’s main prediction is that uncertainty in home shocks increases the propensity to export, while uncertainty in foreign shocks as well the correlation between home and foreign shocks decrease the propensity to export. I test the model’s prediction using French firm-level data and find strong empirical support for the theory’s predictions across a wide range of assumptions and specifications. Moreover, the effect of uncertainty on firms’ export probability is nontrivial. For instance, I find that for a typical manufacturing firm moving up one standard deviation in the home uncertainty distribution increases the probability of exporting by a factor of 7.5 percentage points, while a similar shift in the foreign uncertainty distribution or in the distribution of the correlation between home and foreign shocks decreases the probability of exporting by 3.5 and 3.6 percentage points, respectively