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Quality Differentiation and Trade Intermediation

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Author Info

  • Heiwai Tang

    ()
    (Tufts University)

  • Yifan Zhang

    (Lingnan University)

Abstract

Existing studies show that intermediaries can help verify or screen product quality for buyers. This paper examines this claim both theoretically and empirically in the context of international trade. We develop a heterogeneous firm model that features vertical and horizontal differentiation of products, a coexistence of direct exporting and indirect exporting through intermediaries, and firms. investment in quality signaling. When complete contracts are not available, intermediaries underinvest in quality signaling from the perspective of the producer. For products that are more horizontally differentiated, competition is less intense and even low-quality firms export via intermediaries. These two mechanisms yield a negative (positive) cross-product relation between vertical (horizontal) differentiation and the prevalence of trade intermediation. Intermediation is more prevalent in the more (both physically and culturally) distant destinations, more so for the more vertically and horizontally differentiated products. Using detailed product-level data from China, we find supporting evidence for these predictions.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 340.

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Length: 57
Date of creation: 13 Nov 2012
Date of revision: 13 Nov 2012
Handle: RePEc:csl:devewp:340

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Related research

Keywords: Trade intermediation; vertical differentiation; product differentiation;

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Cited by:
  1. Yue Ma & Heiwai Tang & Yifan Zhang, 2011. "Factor Intensity, Product Switching, and Productivity: Evidence from Chinese Exporters," Development Working Papers 324, Centro Studi Luca d\'Agliano, University of Milano, revised 27 Dec 2011.
  2. Ryan Monarch, 2014. ""It'S Not You, It'S Me": Breakups In U.S.-China Trade Relationships," Working Papers 14-08, Center for Economic Studies, U.S. Census Bureau.
  3. Rollo, Valentina, 2012. "Determinants of Tanzanian export prices," Policy Research Working Paper Series 6225, The World Bank.
  4. Luis Araujo & Giordano Mion & Emanuel Ornelas, 2012. "Institutions and Export Dynamics," CEP Discussion Papers dp1118, Centre for Economic Performance, LSE.
  5. Jennifer Abel-Koch, . "Who uses intermediaries in international trade? Evidence from firm-level survey data," Discussion Papers 11/25, University of Nottingham, GEP.
  6. Fan, Haichao & Li, Yao Amber & Yeaple, Stephen, 2013. "Trade Liberalization, Quality, and Export Prices," MPRA Paper 51370, University Library of Munich, Germany.
  7. Heiwai Tang & Yifan Zhang, 2011. "Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters," Working Papers 392011, Hong Kong Institute for Monetary Research.

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