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Quality Differentiation and Trade Intermediation

  • Heiwai Tang

    ()

    (Tufts University)

  • Yifan Zhang

    (Lingnan University)

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 differentiation 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 predictions.

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File URL: http://www.dagliano.unimi.it//media/WP2012_340.pdf
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Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 340.

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Length: 57
Date of creation: 13 Nov 2012
Date of revision: 13 Nov 2012
Handle: RePEc:csl:devewp:340
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