Heterogeneous Quality Firms and Trade Costs

44 Pages Posted: 20 Apr 2016

See all articles by Matthias Helble

Matthias Helble

Asian Development Bank; ADBI; ADBI

Toshihiro Okubo

University of Geneva - Graduate Institute of International Studies (HEI)

Date Written: March 1, 2008

Abstract

There is increasing empirical evidence that vertical product differentiation is an important determinant of international trade. However, the economic literature so far has solely focused on the case in which quality trade stems from differences between countries. No studies investigate the role of quality trade between similar economies. This paper first develops a simple theoretical trade model that includes vertical product differentiation in a heterogeneous-firm framework. The model yields three main predictions for trade between similar economies. First, exported goods are of higher quality than goods sold on the domestic market. Second, larger economies have on average higher export qualities compared with smaller economies. Third, with increasing trade costs higher quality goods are exchanged. For all three effects, strong empirical support is found using detailed export trade data of the United States and 15 European Union countries.

Keywords: Economic Theory &Research, Markets and Market Access, Common Carriers Industry, Free Trade, Transport and Trade Logistics

Suggested Citation

Helble, Matthias and Okubo, Toshihiro, Heterogeneous Quality Firms and Trade Costs (March 1, 2008). World Bank Policy Research Working Paper No. 4550, Available at SSRN: https://ssrn.com/abstract=1105599

Matthias Helble

Asian Development Bank ( email )

Philippines
006326831120 (Phone)

ADBI ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

ADBI ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Toshihiro Okubo (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5900 (Phone)

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