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Heterogeneous Quality Firms and Trade Costs

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  • Matthias Helble

    (Department of Ethics, Equity, Trade and Human Rights, World Health Organization)

  • Toshihiro Okubo

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

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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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 220.

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Length: 42 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:kob:dpaper:220

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Keywords: Trade Costs; Quality; Vertical Product Differentiation.;

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  1. Toshihiro Okubo, 2009. "Firm heterogeneity and Ricardian comparative advantage within and across sectors," Economic Theory, Springer, vol. 38(3), pages 533-559, March.
  2. Richard Baldwin, 2005. "Heterogeneous Firms and Trade: Testable and Untestable Properties of the Melitz Model," NBER Working Papers 11471, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Martin, Julien & Méjean, Isabelle, 2011. "Low-Wage Countries' Competition, Reallocation Across Firms and the Quality Content of Exports," CEPR Discussion Papers 8231, C.E.P.R. Discussion Papers.
  2. Julien Martin & Isabelle Méjean, 2011. "Low-wage countries' competition, reallocation across firms and the quality content of exports," Working Papers halshs-00962485, HAL.
  3. Naoto Jinji & Xingyuan Zhang & Shoji Haruna, 2010. "Trade Patterns and International Technology Spillovers:Theory and Evidence from Patent Citations," Discussion papers e-10-006, Graduate School of Economics Project Center, Kyoto University, revised Mar 2011.
  4. Ferguson, Shon, 2010. "Endogenous Product Differentiation, Market Size and Prices," Research Papers in Economics 2010:26, Stockholm University, Department of Economics.
  5. Ito, Tadashi, 2012. "Revisiting the determinants of unit values," IDE Discussion Papers 356, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  6. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
  7. claudio E. Montenegro & Mariana Pereira & Isdro Soloaga, 2010. "El efecto de China en el comercio internacional de América Latina," Working Papers wp324, University of Chile, Department of Economics.
  8. Claudio E. Montenegro & Mariana Pereira & Isidro Soloaga, 2010. "China’s effect on Latin America’s international trade," Serie documentos de trabajo del Centro de Estudios Económicos 2010-08, El Colegio de México, Centro de Estudios Económicos.
  9. Tetsugen Haruyama & Laixun Zhao, 2008. "Trade and Firm Heterogeneity In A Quality-Ladder Model of Growth," Discussion Paper Series 223, Research Institute for Economics & Business Administration, Kobe University.
  10. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.

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