Distribution Costs, Product Quality, and Cross-Country Income Differences

We document that the efficiency of trade distribution systems have an important exportcountry specific component: all else equal, wealthier countries have smaller but more frequent export shipments. A model of distribution and trade reveals that (i) this outcome is consistent with wealthier countries having lower per-shipment export costs and (ii) these lower costs give wealthier countries a comparative advantage in high quality products. Using the model’s structure, we estimate export per-shipment costs for a sample of 74 countries. We find that these costs vary widely across countries, with the 90th percentile value of per-shipment costs being almost three times larger than the 10th percentile value. A calibrated version of the model that incorporates these cost estimates reveals that cross-country differences in the efficiency of export distribution systems explain almost forty percent of the observed crosscountry differences in income, and almost one quarter of the elasticity of export prices with respect to countries’ per capita income. It also shows that policies that reduce export shipment costs lead to significant welfare gains, mainly due to induced quality upgrading.