Market Efficiency, Heterogeneous Trade Costs and Export‐Only Firms

Abstract This paper provides a two‐country general equilibrium model under monopolistic competition, in which we incorporate heterogeneous fixed export costs, a non‐zero export tax rebate rate and efficiency asymmetry to explain the existence of export‐only firms. We focus on the impact of efficiency differences on social welfare and the evolution of export‐only activities from autarky to trade. We show that exposure to trade brings a country of larger size and with higher efficiency more welfare gains, including higher industry productivity and greater variety of products. We also find that firms that face lower fixed export costs enjoy greater export tax rebates and firms that are located in more efficient countries have a greater chance of becoming export‐only firms. Further internationalization promotes the prosperity of export‐only activities.