Quality Heterogeneity and Global Economic Growth

Abstract:     
This paper develops a fully-endogenous, variety-expansion growth model with firm-specific 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 competition. 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 inefficient, and this leaves room for welfare-improving government intervention.

Number of Pages in PDF File: 49

Keywords: Trade, growth, firm heterogeneity, product quality, R&D, and trade liberalization

JEL Classification: F1, F4, L1, O3, O4

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