Geography of Export Prices and Importer-Exporter Income Differences

Abstract

We develop a model of endogenous quality choice and trade that combines non-iceberg trade costs and non-homothetic preferences to capture the effect of importer-exporter income differences on geographic variation in quality and export prices. The differences in income substantially alter the effect of trade costs on quality. The incentive to trade high quality goods given high trade costs (the Alchian-Allen effect) is tempered by the increased remoteness from rich importers demanding high quality goods. The estimated effects of distance and contiguity in a sample of product-level imports to nine Latin American countries and the United States support our theory.

Keywords: quality, relative income, economic geography, Alchian-Allen effect, Linder, distance

JEL Classification: F1