Age Matters: The Effects of Trade Liberalization on Firms over the Life Cycle

This paper shows that firms’ responses to trade shocks depend on their age. Focusing on India’s trade liberalization during the 1990s, we find that reductions in input tariffs raise quantities and sales more for younger firms than for older firms. These age differences are not driven by selection effects and are not explained by age-varying observables such as firm size or productivity. To interpret the evidence, we develop a firm life-cycle model in which adjustment costs lead young firms to rely more heavily on flexible intermediate inputs as they grow toward mature scale. The model shows that this dynamic input mix makes input-cost reductions especially valuable early in the firm life cycle. The results highlight firm age as a distinct dimension of heterogeneity in the transmission of trade liberalization.