Quality Differentiation and Trade Intermediation

Posted: 13 Feb 2013 Last revised: 4 Jul 2014

See all articles by Heiwai Tang

Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); The University of Hong Kong - Faculty of Business and Economics; CESIfo; Kiel Institute for the World Economy

Yifan Zhang

Sun Yat-Sen University (SYSU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2012

Abstract

Existing studies show that intermediaries can help verify or screen product quality for buyers. This paper examines this claim both theoretically and empirically in the context of international trade. We develop a heterogeneous firm model that features vertical and horizontal differentiation of products, a coexistence of direct exporting and indirect exporting through intermediaries and firms’ investment in quality signaling. When complete contracts are not available, intermediaries underinvest in quality signaling from the perspective of the producer. For products that are more horizontally differentiated, competition is less intense and even low-quality firms export via intermediaries. These two mechanisms yield a negative (positive) cross-product relation between vertical (horizontal) differentiation and the prevalence of trade intermediation. Intermediation is more prevalent in the more (both physically and culturally) distant destinations, more so for the more vertically and horizontally differentiated products. Using detailed product-level data from China, we find supporting evidence for these predictions.

Keywords: Trade intermediation, vertical diffrentiation, product differentiation

JEL Classification: F12, L15

Suggested Citation

Tang, Heiwai and Zhang, Yifan, Quality Differentiation and Trade Intermediation (November 1, 2012). Centro Studi Luca d'Agliano Development Studies Working Paper No. 340, Available at SSRN: https://ssrn.com/abstract=2214960 or http://dx.doi.org/10.2139/ssrn.2214960

Heiwai Tang (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

CESIfo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Yifan Zhang

Sun Yat-Sen University (SYSU) - Department of Economics ( email )

8 Castle Peak Road
Tuen Mun, NT
Hong Kong

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