Improving 'National Brands': Reputation for Quality and Export Promotion Strategies

51 Pages Posted: 3 Mar 2013 Last revised: 25 May 2014

See all articles by Julia Cage

Julia Cage

Sciences Po Paris Department of Economics; Centre for Economic Policy Research (CEPR)

Dorothee Rouzet

Harvard University

Date Written: May 25, 2014

Abstract

This paper studies the effect of firm and country reputation on exports when buyers cannot observe quality prior to purchase. Firm-level demand is determined by expected quality, which is driven by the dynamics of consumer learning through experience and the country of origin's reputation for quality. We show that asymmetric information can result in multiple steady-state equilibria with endogenous reputation. We identify two types of steady states: a high-quality equilibrium (HQE) and a low-quality equilibrium (LQE). In a LQE, only the lowest-quality and the highest-quality firms are active; a range of relatively high-quality firms are permanently kept out of the market by the informational friction. Countries with bad quality reputation can therefore be locked into exporting low-quality, low-cost goods. Our model delivers novel insights about the dynamic impact of trade policies. First, an export subsidy increases the steady-state average quality of exports and welfare in a LQE, but decreases both quality and welfare in a HQE. Second, there is a tax/subsidy scheme based on the duration of export experience that replicates the perfect information outcome. Third, a large reputation shock is self-fulfilling when the economy has multiple steady states. Finally, a minimum quality standard can help an economy initially in a LQE moving to a HQE, but is not necessarily welfare improving.

Keywords: product quality, product differentiation, export promoting, industrial policy, trade

JEL Classification: F12, F13, L15, L52, O14, O24

Suggested Citation

Cage, Julia and Rouzet, Dorothee, Improving 'National Brands': Reputation for Quality and Export Promotion Strategies (May 25, 2014). Available at SSRN: https://ssrn.com/abstract=2227065 or http://dx.doi.org/10.2139/ssrn.2227065

Julia Cage (Contact Author)

Sciences Po Paris Department of Economics ( email )

28 Rue des Saints-Pères
Paris, 75007
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dorothee Rouzet

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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