School of Economic Sciences - Washington State University

The theorem says optimal mission intensity inversely depends on the state and country-specificmission costs, d i and g j , and the default difficulty in penetrating the foreign country, f ij .Optimalmission intensity is increasing in the size of the foreign country, and the size of the state.These fundamentals are summarized by ˜X ij , the state exports in the absence of government action.Therefore the model predicts a positive relationship between untreated exports and missions.This result is not obvious.One may have thought trade missions would be most effectiveif the target country was not a large export destination without government. Then governmentinvestment would open the country up for exports. On the contrary, optimal mission intensity isgreater for targets where there is a large export relationship in the absence of government. Theeconomics underlying this result are displayed in figure 1.Figure 1 displays the pdf for the Pareto distribution (2). Consider the case of a target countrywith large threshold productivity, ˆφ1 . It does not matter if this high threshold is due to smallcountry size, which affects all states equally, or high transportation costs or high f, which affectsthe match between a state-country pair.Since ˆφ 1 is large, there is a small mass of firms withproductivity greater than ˆφ 1 . A trade mission reduces the effective fixed cost and the thresholdproductivity to ˆφ 2 . The additional aggregate exports accrue exclusively from the extensive margin:the exports of new exporters induced by the lower effective fixed cost. The extensive margin isthe mass of firms between ˆφ 1 and ˆφ 2 . There is no change in exports from those with productivitygreater than ˆφ 1 because in this model, the general equilibrium effects of θ are suppressed, and thusa decrease in the fixed cost does not affect exports for a firm with productivity above ˆφ 1 .Now consider the impact of a mission to another country identical to the first except for a lowerthreshold productivity, ˆφ3 . There is a much larger export relationship with this second countrywithout government because there is a larger mass of firms to the right of ˆφ3 than ˆφ 1 . A missionto this country reduces the fixed cost and the threshold productivity to ˆφ 4 . Again the additionalstate exports are from the extensive margin, the mass of firms between ˆφ 3 and ˆφ 4 . It is clear fromfigure 1 there is a far greater mass of new exports from a mission to the second country comparedto the first. This effect is greater the larger is γ because this puts more mass in the left tail atthe expense of the right tail. Though firms with productivity between ˆφ 1 and ˆφ 2 each export morethan any firm with productivity between ˆφ 3 and ˆφ 4 , the difference in aggregate is more than made12