Quality Heterogeneity and Global Economic Growth

This paper develops a fully-endogenous, variety-expansion growth model with firm- specifc quality heterogeneity, limit pricing, and an endogenous distribution of markups. Trade induces only firms with high-quality products to export, whereas firms with low- quality products serve only the domestic market. Trade liberalization, measured by a reduction in trade costs or a reduction in foreign-market entry costs, shifts resources from low-quality to high-quality products and intensifies the product market competi- tion. However, it has ambiguous effects on the average markup, long-run growth, and welfare. An increase in the rate of population growth or in the intensity of international knowledge spillovers accelerates economic growth. The laissez-faire equilibrium is ineffcient, and this leaves room for welfare-improving government intervention.