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The Quality-Complementarity Hypothesis: Theory and Evidence from Colombia

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Author Info
Kugler, Maurice () (Wilfrid Laurier University)
Verhoogen, Eric () (Columbia University)

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Abstract

This paper presents a tractable formalization and an empirical investigation of the quality-complementarity hypothesis, the hypothesis that input quality and plant productivity are complementary in generating output quality. We embed this complementarity in a general-equilibrium trade model with heterogeneous, monopolistically competitive firms, extending Melitz (2003), and show that it generates distinctive implications for two simple, observable within-sector correlations − between output prices and plant size and between input prices and plant size − and for how those correlations vary across sectors. Using uniquely rich and representative data on the unit values of outputs and inputs of Colombian manufacturing plants, we then document three facts: (1) output prices are positively correlated with plant size within industries on average; (2) input prices are positively correlated with plant size within industries on average; and (3) both correlations are more positive in industries with more scope for quality differentiation, as measured by the advertising and R&D intensity of U.S. industries. The predicted and observed correlations between export status and input and output prices are similar to those for plant size. We present additional evidence that market power of either final-good producers or input suppliers does not fully explain the empirical patterns we observe. These findings are consistent with the predictions of our model and difficult to reconcile with alternative models that impose symmetry or homogeneity of either inputs or outputs. We interpret the results as broadly supportive of the quality-complementarity hypothesis.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3932.

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Length: 61 pages
Date of creation: Jan 2009
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Handle: RePEc:iza:izadps:dp3932

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Related research
Keywords: product quality; heterogeneous firms; international trade; plant size;

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Find related papers by JEL classification:
O1 - Economic Development, Technological Change, and Growth - - Economic Development
F1 - International Economics - - Trade
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roc Armenter & Miklós Koren, 2009. "Economies of Scale and the Size of Exporters," CeFiG Working Papers 7, Center for Firms in the Global Economy, revised 12 Mar 2009. [Downloadable!]
    Other versions:
  2. Pablo D. Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2009. "Income Distribution, Product Quality, and International Trade," NBER Working Papers 15329, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Rosario Crinò & Paolo Epifani, 2009. "Export Intensity and Productivity," Development Working Papers 271, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
  4. Crozet, Matthieu & Head, Keith & Mayer, Thierry, 2009. "Quality sorting and trade: Firm-level evidence for French wine," CEPR Discussion Papers 7295, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Amit Khandelwal, 2009. "The Long and Short (of) Quality Ladders," NBER Working Papers 15178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Maria Guadalupe & Julie Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," NBER Working Papers 14491, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Bulent Unel & Elias Dinopoulos, . "A Simple Model of Quality Heterogeneity and International Trade," Departmental Working Papers 2009-04, Department of Economics, Louisiana State University. [Downloadable!]
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