Template-Type: ReDIF-Paper 1.0
Author-Name: Povilas Lastauskas
Author-X-Name-First: Povilas
Author-X-Name-Last: Lastauskas
Author-Email: p.lastauskas@qmul.ac.uk
Author-Workplace-Name: School of Business and Management, Queen Mary University of London.
Author-Name: Aurelija Proskute
Author-X-Name-First: Aurelija
Author-X-Name-Last: Proskute
Author-Email: aproskute@lb.lt
Author-Workplace-Name: Bank of Lithuania and Vilnius University
Author-Name: Alminas Zaldokas	
Author-X-Name-First: Alminas
Author-X-Name-Last: Zaldokas
Author-Email: alminas@ust.hk
Author-Workplace-Name: Hong Kong University of Science and Technology (HKUST)
Title: How Do Firms Adjust When Trade Stops?
Abstract: We investigate how _rms adjust to the introduction of sudden, unanticipated and
eventually long-lasting economic sanctions. We explore a unique event when, due to 
political reasons, unrelated to the underlying economic conditions, the exporters completely lost access 
to a major foreign market. In particular, in 2014 Russia introduced sanctions on imports from Europe, 
which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time 
employment is used as the first shock absorber, followed by investment and full-time employment. 
At the same time, firms dampen shock effects by expanding to other export markets. To rationalize 
this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities 
in the labor market along with heterogeneous variable trade costs.
Length: 60 pages
Creation-Date: 2023-03
Revision-Date: 
Publication-Status: 
Classification-JEL: D22, D25, F14, F16, F51
Keywords: economic sanctions, firm adjustment margins, part-time employment, new export markets
File-URL: http://cgr.sbm.qmul.ac.uk/CGRWP111.pdf
Number: 111
Handle: RePEc:cgs:wpaper:111