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Quality Differentiation and Trade Intermediation

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  • Heiwai Tang
  • Yifan Zhang

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 differentiations 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 predications.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0771.

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Date of creation: 2012
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Handle: RePEc:tuf:tuftec:0771

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Related research

Keywords: Trade intermediation; vertical differentiation; product differentiation;

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Cited by:
  1. Jennifer Abel-Koch, . "Who uses intermediaries in international trade? Evidence from firm-level survey data," Discussion Papers 11/25, University of Nottingham, GEP.
  2. Yue Ma & Heiwai Tang & Yifan Zhang, 2011. "Factor Intensity, Product Switching, and Productivity: Evidence from Chinese Exporters," Discussion Papers Series, Department of Economics, Tufts University 0761, Department of Economics, Tufts University.
  3. 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.
  4. Araujo, Luis & Mion, Giordano & Ornelas, Emanuel, 2012. "Institutions and Export Dynamics," CEPR Discussion Papers 8809, C.E.P.R. Discussion Papers.
  5. Fan, Haichao & Li, Yao Amber & Yeaple, Stephen, 2013. "Trade Liberalization, Quality, and Export Prices," MPRA Paper 51370, University Library of Munich, Germany.
  6. Rollo, Valentina, 2012. "Determinants of Tanzanian export prices," Policy Research Working Paper Series 6225, The World Bank.
  7. 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.

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