Heterogeneous Quality Firms and Trade Costs
There is increasing empirical evidence that vertical product differentiation is an important determinant of international trade. However, the economic literature so far has solely focused on the case in which quality trade stems from differences be...
| Main Authors: | , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/03/9069456/heterogeneous-quality-firms-trade-costs http://hdl.handle.net/10986/6558 |
| Summary: | There is increasing empirical evidence
that vertical product differentiation is an important
determinant of international trade. However, the economic
literature so far has solely focused on the case in which
quality trade stems from differences between countries. No
studies investigate the role of quality trade between
similar economies. This paper first develops a simple
theoretical trade model that includes vertical product
differentiation in a heterogeneous-firm framework. The model
yields three main predictions for trade between similar
economies. First, exported goods are of higher quality than
goods sold on the domestic market. Second, larger economies
have on average higher export qualities compared with
smaller economies. Third, with increasing trade costs higher
quality goods are exchanged. For all three effects, strong
empirical support is found using detailed export trade data
of the United States and 15 European Union countries. |
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