Tamar Khachaturian, David Riker


We analyze trade in services using the economic model in Helpman, Melitz, and Yeaple (2004), which features multiple modes of supply and firm heterogeneity. We calibrate the model to the U.S. markets for architectural and engineering services and legal services, and then we estimate the economic impact of reducing fixed costs of supplying U.S. markets for these two types of professional services through cross-border trade and, alternatively, through affiliate transactions. Among other results, we estimate that reducing the fixed costs of trade in these professional services by half would have large effects on the value of cross-border imports into the U.S. market and on foreign affiliate sales in the U.S. market, but would have only small effects on the sales of domestic producers and on overall prices of the services in the U.S. market.