Zeros, Quality and Space: Trade Theory and Trade Evidence

57 Pages Posted: 23 May 2008

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

James Harrigan

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

Abstract

Product-level data on bilateral U.S. exports exhibit two strong patterns. First, most potential export flows are not present, and the incidence of these export zeros is strongly correlated with distance and importing country size. Second, export unit values are positively related to distance. We show that every well-known multi-good general equilibrium trade model is inconsistent with at least some of these facts. We also offer direct statistical evidence of the importance of trade costs in explaining zeros, using the long-term decline in the relative cost of air shipment to identify a difference-in-differences estimator. To match these facts, we propose a new version of the heterogeneous-firms trade model pioneered by Melitz (2003). In our model, high quality firms are the most competitive, with heterogeneous quality increasing with firms' heterogeneous cost.

Keywords: Heterogeneous-firm trade models, QHFT model, Quality and trade, Testing trade theories

JEL Classification: F0, F11, F12

Suggested Citation

Baldwin, Richard E. and Harrigan, James, Zeros, Quality and Space: Trade Theory and Trade Evidence (June 2007). , Vol. , pp. -, 2007. Available at SSRN: https://ssrn.com/abstract=1136693

Richard E. Baldwin (Contact Author)

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

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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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James Harrigan

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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