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Quality heterogeneity and global economic growth

  • Dinopoulos, Elias
  • Unel, Bulent

This paper develops a fully endogenous, variety-expansion growth model with firm-specific quality heterogeneity, limit pricing, and an endogenous distribution of markups. Firms with high-quality products engage in exporting, firms with intermediate-quality products serve the domestic market, and inefficient firms with low-quality products exit the market. Trade liberalization, measured by a reduction in trade costs or a decline in foreign market entry costs, generates a reallocation of resources from low-quality to high-quality products and exit of inefficient firms. However, it has ambiguous effects on the average global quality level, long-run growth, and welfare. An increase in the rate of population growth or in the intensity of trade-related knowledge spillovers accelerates economic growth. The laissez-faire equilibrium is inefficient, and this leaves room for welfare-improving government intervention.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 5 (June)
Pages: 595-612

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:5:p:595-612
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