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Quality Heterogeneity and Global Economic Growth

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Abstract

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.

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  • Bulent Unel & Elias Dinopoulos, 2009. "Quality Heterogeneity and Global Economic Growth," Departmental Working Papers 2009-06, Department of Economics, Louisiana State University.
    • Handle: RePEc:lsu:lsuwpp:2009-06
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