How Geography Affects Quality

42 Pages Posted: 25 Jan 2013

See all articles by Volodymyr Lugovskyy

Volodymyr Lugovskyy

Indiana University Bloomington - Department of Economics

Alexandre Skiba

University of Wyoming - College of Business - Department of Economics and Finance

Date Written: August 20, 2012

Abstract

This is the first paper to provide a theoretical model that connects the quality of product-level bilateral trade flows with the geographic position of the exporter. We show that, in addition to commonly used importer characteristics, quality increases (i) in trade-weighted specific transportation cost to the destinations other than the importer and (ii) in trade-weighted preference for quality of destinations other than the importer. The two channels represent extensions of the familiar Alchian-Allen and Linder quality theories to multilateral setting. The model implies that market access to high-income and remote importers can improve quality of exports from low-income countries.

The data confirm the theoretical prediction. Exporters of differentiated goods that face a stronger demand for quality from richer countries charge 5-9% more for all destinations. At the same time, countries whose demand is especially distorted by the Alchian-Allen effect charge 14-24% more. Moreover, geography is more significant to the quality choice of developing countries. Multilateral geographic factors explain 7.6% of the price variation for the non-OECD exporters, and only 4.2% for the OECD exporters. The Alchian-Allen effect influences an exporter's quality roughly two to three times as much as the proximity to rich importers does.

Keywords: quality, vertical specialization, trade and development, economic geography, Alchian-Allen eff

JEL Classification: F1

Suggested Citation

Lugovskyy, Volodymyr and Skiba, Alexandre, How Geography Affects Quality (August 20, 2012). Available at SSRN: https://ssrn.com/abstract=2206593 or http://dx.doi.org/10.2139/ssrn.2206593

Volodymyr Lugovskyy (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Alexandre Skiba

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

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