Firm output adjustment to trade liberalization : theory with application to the Moroccan experience

Over the period 1984 to 1987, a major liberalization of restrictive trade policies was implemented in the Moroccan manufacturing sector. The level of imports changed across different industries according to each industry's degree of liberalization. The paper focuses on exploring the distribution of output adjustment among incumbent firms to the changes in imports following a particular trade liberalization episode. A domestic oligopoly model where competing firms are not equally efficient, with perfectly substitutable imports fixed at some exogenous pre-reform level, provides the theoretical framework for the study. Such a model predicts that firm output contraction will be larger the greater the increase in imports. The results represent a first step in the analysis of firm adjustment to trade liberalization. While the paper shows that output in small firms contracts more than output in large firms, it presents no evidence of a shift of production from small to large firms.