Firms' heterogeneity, demand accumulating, and exchange rate pass-through

In this article, we study how the export behaviors of new and incumbent exporters differentially respond to exchange rate shocks. We establish a dynamic model, in which new exporters strategically charge a lower price than incumbent exporters to grow their customer base and increase future sales. The model predicts that new exporters adjust their prices more aggressively relative to their incumbent counterparts in response to exchange rate fluctuations. Using a transaction-level data set containing all Chinese exporters during the 2000-2009 period, we find supporting evidence for the model's predictions: new exporters adjust their price 1.5 times more than incumbent exporters. This, in turn, results in export quantities being less responsive to exchange rate shocks among new exporters. The result holds for a series of robustness checks. The findings imply that there are different degrees of exchange rate pass-through among new and incumbent exporters.