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Quality Uncertainty and Intermediation in International Trade

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  • Kunal Dasgupta
  • Jordi Mondria

Abstract

Uncertainty about product quality is endemic in international trade. We develop a dynamic, two country model where home producers differ in terms of the quality of the products they sell. This quality is imperfectly observed by foreign consumers initially but known once the product is consumed. We show that this uncertainty generates an information cost of exporting, over and above the usual fixed costs used in standard heterogeneous firm models. We use the model to examine the role played by intermediaries in alleviating quality uncertainty. An intermediation technology involving higher marginal cost but lower fixed cost arises endogenously in our model. We analyze the sorting of exporters into different exporting modes. In the process, we uncover a novel externality of using intermediaries. We go on to study how the equilibrium depends on the degree of product heterogeneity, the level of information and the measure of available intermediaries.

Suggested Citation

  • Kunal Dasgupta & Jordi Mondria, 2012. "Quality Uncertainty and Intermediation in International Trade," Working Papers tecipa-462, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-462
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    References listed on IDEAS

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    Cited by:

    1. Blanchard, Emily & Chesnokova, Tatyana & Willmann, Gerald, 2013. "Private labels and international trade: Trading variety for volume," Kiel Working Papers 1829, Kiel Institute for the World Economy (IfW).
    2. Creane, Anthony & Jeitschko, Thomas D., 2016. "Exporting to bypass weak institutions," European Economic Review, Elsevier, vol. 83(C), pages 185-197.
    3. Gabor Bekes & Balázs Murakozy, 2015. "The ladder of foreign sales: Internationalization modes of European firms," IEHAS Discussion Papers 1527, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    4. Pol Antràs & Arnaud Costinot, 2011. "Intermediated Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1319-1374.
    5. Julia Cage & Dorothée Rouzet, 2014. "Improving "National Brands": Reputation for Quality and Export Promotion Strategies," Working Papers halshs-00797006, HAL.
    6. Cagé, Julia & Rouzet, Dorothée, 2015. "Improving “national brands”: Reputation for quality and export promotion strategies," Journal of International Economics, Elsevier, vol. 95(2), pages 274-290.
    7. Rasmusen, Eric, 2017. "A model of trust in quality and North–South trade," Research in Economics, Elsevier, vol. 71(1), pages 159-170.
    8. Sandra Poncet & Meina Xu, 2015. "Quality Screening and Trade Intermediaries: Evidence from China," Working Papers 2015-20, CEPII research center.

    More about this item

    Keywords

    Intermediaries; quality; uncertainty; screening; asymmetric information;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F10 - International Economics - - Trade - - - General
    • F19 - International Economics - - Trade - - - Other
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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