asymmetries in the response of trade flows to exchange rate appreciation versus depreciation.<sup>3</sup> A limitation of this approach is that data on the volume of trade flows, even for very disaggregated commodities, cannot distinguish the entry and exit of exporters from the supply response of continuing exporters. With the exception of Campa (1993), the foreign market entry and exit patterns, which are the focus of the theory, have not been exanined for consistency with the sunkcost hysteresis model.' In this paper we develop an empirical test of the sunk-cost hysteresis model that directly examines entry and exit patterns in plant-level panel data. We develop and estimate a dynamic discrete choice model of the decision to export when sunk entry or exit costs are present. In essence, this model predicts exporting status in the current period as a function of plant characteristics, previous exporting status and a serially correlated disturbance. It not only permits us to formally test for the presencc of sunk costs (using coefficients on lagged exporting status), it allows us to summarize the effects of time, individual producer characteristics, and prior exporting experience on the probability of participating in the export market. The data we use describe the export patterns of I The empirical evidence derived from trade flow data has produced no clear consensus. Based **on** aggregate U.S. data, Baldwin (1988) concludes **ftat** the substantial appreciation of the U.S. dollar during **the** early 1980's resulted in a structural shift in U.S. impon pricing equations. This is consisteant with sunk-cost hysteresis. In contrast, Gagnon (1987) finds that trade has been more responsive to relative prices in the more uncertain post-Bretton Woods era, a result inconsistent with some versions of the hysteresis model. Using time-series data for U.S manufacturing industries. Feinberg (1992) fmds that exports became more dispersed across destination markets as the dollar depreciated, suggesting that there was firm entry into new country markets. The effect was weaker in industries where distribution networks, and thus presumably sunk entry costs, are more important. Parsley and Wei (1993) focus on bilateral U.S.-Canada and U.S.-Japan trade flows fbr very disaggregated commodities. They find that both the past history of U.S. exchange rate changes and measures of exchangerate volatility had no significant effect on trade flows. Both findings ar inconsistent with the hysteresis model.

' Campa (1993) examines the number of foreign firms that made direct investnents in the 61 U.S. wholesale trade industries over the 1981-87 period. He finds that exchange-rate uncertainty, which is proxied by the stndard deviation of the monthly rate of growth of the exchange rate, is negatively cormlated with the number of firms investing in the U.S.. He also reports that an industry's sunk costs, which arc proxied by the advertising-sales ratio and ratio of fixed assets to net worth of firms in the industry, is negatively correlated with foreign-firm entry. Both findings are consistent with the hysteresis model. Although not in a trade context, related work by Bresnahan and Reiss (1991, 1994) shows how data on net entry into a market can be used to make inferences about the ratio of sunk entry and exit costs to avenge profitability. Their technique exploits the asymmetric response of the number of producers to population (demand) changes across diffierent geographic markets. However, as they acknowledge, persistance in behavior due to permanent cross-producer differences in profitability can create the appearance of sunk costs in their model.

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