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A model of trust in quality and North–South trade

Listed author(s):
  • Rasmusen, Eric
Registered author(s):

    Why do some countries produce higher quality goods than other countries? This paper suggests that one reason is self-perpetuating reputations, modelling the idea with a Klein–Leffler reputation model embedded in a general equilibrium model of trade. Reputation differences are particularly interesting because reputation is a form of “social capital”. Like product differentiation, it can explain why countries might trade even if their technologies and endowments are identical, why firms could profit from exports even if the foreign price is no higher than the domestic one, and why governments like to have “high-value” sectors. Ideally, a developing country would shift its own producers to a high-quality equilibrium; if that is not possible, the next best thing is to import experience goods and substitute to home production of goods for which reputation is not important.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1090944316300825
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    Article provided by Elsevier in its journal Research in Economics.

    Volume (Year): 71 (2017)
    Issue (Month): 1 ()
    Pages: 159-170

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    Handle: RePEc:eee:reecon:v:71:y:2017:i:1:p:159-170
    DOI: 10.1016/j.rie.2016.05.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

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