Learning, Prices, and Firm Dynamics

We document new facts about the evolution of arm performance and prices in international markets, and propose a theory of arm dynamics emphasizing the interaction between learning about demand and quality choice to explain the observed patterns. Using data from the Portuguese manufacturing sector, we and that: (1)firms with longer spells of activity in export destinations tend to ship larger quantities at lower prices; (2) older exporters tend to use more expensive inputs; (3) the volatility of output and input prices tends to decline with export experience; and (4) input prices and quantities tend to increase with revenue growth within arms. We develop a model of endogenous input and output quality choices in a learning environment that is able to account for these patterns. Counterfactual simulations reveal that minimum quality standards on traded goods reduce welfare by lowering entry in export markets and reallocating resources from old and large towards young and small arms.