Positive and negative effects of distance on export prices

In a model of international trade with non-homothetic preferences and endogenous product quality where some firms choose common quality for all destinations, we find a novel effect of distance on quality and export prices. This effect is either positive or negative depending on whether the importer is, respectively, poor or rich relative to the other export destinations. Interestingly, the effect goes against the well-documented Alchian–Allen effect if the importer is relatively rich. This is because greater distance to relatively rich countries decreases the demand for quality. The estimated effects of distance in a sample of product-level imports to nine Latin American countries and the United States support our theory.