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Heterogeneous Quality Firms and Trade Costs

Author

Listed:
  • Matthias Helble

    (Department of Ethics, Equity, Trade and Human Rights, World Health Organization)

  • Toshihiro Okubo

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

There is increasing empirical evidence that vertical product differentiation is an important determinant of international trade. However, the economic literature so far has solely focused on the case in which quality trade stems from differences between countries. No studies investigate the role of quality trade between similar economies. This paper first develops a simple theoretical trade model that includes vertical product differentiation in a heterogeneous-firm framework. The model yields three main predictions for trade between similar economies. First, exported goods are of higher quality than goods sold on the domestic market. Second, larger economies have on average higher export qualities compared with smaller economies. Third, with increasing trade costs higher quality goods are exchanged. For all three effects, strong empirical support is found using detailed export trade data of the United States and 15 European Union countries.

Suggested Citation

  • Matthias Helble & Toshihiro Okubo, 2008. "Heterogeneous Quality Firms and Trade Costs," Discussion Paper Series 220, Research Institute for Economics & Business Administration, Kobe University.
  • Handle: RePEc:kob:dpaper:220
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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp220.pdf
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    References listed on IDEAS

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    3. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
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    5. Toshihiro Okubo, 2009. "Firm heterogeneity and Ricardian comparative advantage within and across sectors," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(3), pages 533-559, March.
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    1. repec:eee:reecon:v:71:y:2017:i:3:p:540-563 is not listed on IDEAS
    2. Claudio E. Montenegro & Mariana Pereira & Isidro Soloaga, 2011. "El efecto de China en el comercio internacional de América Latina," Estudios de Economia, University of Chile, Department of Economics, vol. 38(2 Year 20), pages 341-368, December.
    3. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
    4. Tetsugen Haruyama & Laixun Zhao, 2008. "Trade and Firm Heterogeneity In A Quality-Ladder Model of Growth," Discussion Paper Series 223, Research Institute for Economics & Business Administration, Kobe University.
    5. Sugita, Yoichi & Teshima, Kensuke & Seira, Enrique, 2016. "Assortative matching of exporters and importers," IDE Discussion Papers 610, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    6. Shon M. Ferguson, 2015. "Endogenous Product Differentiation, Market Size and Prices," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 45-61, February.
    7. Julien Martin & Isabelle Méjean, 2011. "Low-wage countries' competition, reallocation across firms and the quality content of exports," Working Papers halshs-00962485, HAL.
    8. Julien Martin & Isabelle Méjean, 2011. "Low-wage countries' competition, reallocation across firms and the quality content of exports," PSE - G-MOND WORKING PAPERS halshs-00962485, HAL.
    9. Naoto Jinji & Xingyuan Zhang & Shoji Haruna, 2010. "Trade Patterns and International Technology Spillovers:Theory and Evidence from Patent Citations," Discussion papers e-10-006, Graduate School of Economics Project Center, Kyoto University, revised Mar 2011.
    10. Claudio E. Montenegro & Mariana Pereira & Isidro Soloaga, 2010. "China’s effect on Latin America’s international trade," Serie documentos de trabajo del Centro de Estudios Económicos 2010-08, El Colegio de México, Centro de Estudios Económicos.
    11. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.
    12. Tadashi Ito & Toshihiro Okubo, 2016. "The Impact of the Euro on the Quality of Trade: Evidence from the European Union," Manchester School, University of Manchester, vol. 84(4), pages 506-527, July.
    13. Ito, Tadashi, 2012. "Revisiting the determinants of unit values," IDE Discussion Papers 356, Institute of Developing Economies, Japan External Trade Organization(JETRO).

    More about this item

    Keywords

    Trade Costs; Quality; Vertical Product Differentiation.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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