Trade, Skills, and Quality Upgrading: A Theory with Evidence from Colombia

56 Pages Posted: 24 Mar 2014 Last revised: 30 Sep 2014

See all articles by Ana Cecilia Fieler

Ana Cecilia Fieler

University of Pennsylvania

Marcela Eslava

University of the Andes (CEDE)

Daniel Yi Xu

Duke University

Date Written: March 2014

Abstract

We develop a model of international trade with heterogeneous firms and endogenous quality choices. Producing higher quality involves returns to scale, it is intensive in skilled labor and high-quality inputs. Firms' quality choices are interrelated because firms sell their goods to consumers and to other firms. We estimate the model using data on manufacturing plants in Colombia before the trade liberalization, simulate a counterfactual liberalization and compare the results to post-liberalization data. Like other unilateral trade liberalizations in developing countries, the skill premium and skill intensity in manufacturing increased, and the size of firms decreased in Colombia. In the model, lower tariffs lead importers and exporters to upgrade quality, increasing the domestic demand and supply of high-quality inputs. Other firms then upgrade their own product quality, thereby amplifying these effects of domestic inputs. Relative demand for skilled labor increases in a wide range of firms, despite a contraction in sales.

Suggested Citation

Fieler, Ana Cecilia and Eslava, Marcela and Yi Xu, Daniel, Trade, Skills, and Quality Upgrading: A Theory with Evidence from Colombia (March 2014). NBER Working Paper No. w19992. Available at SSRN: https://ssrn.com/abstract=2413340

Ana Cecilia Fieler (Contact Author)

University of Pennsylvania

Philadelphia, PA 19104
United States

Marcela Eslava

University of the Andes (CEDE) ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Daniel Yi Xu

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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