Publications

We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. 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.

Keywords: economic sanctions, firm adjustment margins, part-time employment, new export markets.

JEL Classification: D22, D25, F14, F16, F51