Convex vacancy creation costs shape firms’ responses to trade liberalization, since they induce capacity constraints by reducing firms’ capability to grow. A profit maximizing firm will not fully meet the increased foreign demand as in Melitz (2003), but will only serve a few export markets. As a consequence more productive firms will be able to profitably export to more countries and charge unlike in Melitz (2003) higher or similar prices than less productive firms. This is well in line with empirical findings. Trade liberalization also affects labor market outcomes. Increased profits by exporting firms reduces unemployment
and increases the wage dispersion in the on-the-job search model.