Tariff Pass-through and Firm’s Productivity: A Case Study of Iran

Abstract

T

his paper investigates the heterogeneous reaction of Iranian exporters to the tariff rate changes, how export prices are influenced differently by the increase or decrease in foreign importers' tariff rate. Using the Iranian transaction level export data and firm level data during the period 2002-2015, we find that tariff pass through for Iranian firms are incomplete and exporters absorb part of the increase in tariff rate in their markups. The results also reveal that there is an inverse relationship between the tariff absorption elasticity and firm productivity, as higher productivity firms absorb less tariff changes in their markups and pass most of it into their prices than lower productive firms. There is the same finding on the relationship between export volume elasticity relative to tariff changes and firm's productivity.