The Determinants of Quality Specialization

76 Pages Posted: 24 Oct 2016

See all articles by Jonathan I. Dingel

Jonathan I. Dingel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: October 2016

Abstract

A growing literature suggests that high-income countries export high-quality goods. Two hypotheses may explain such specialization, with different implications for welfare, inequality, and trade policy. Fajgelbaum, Grossman, and Helpman (2011) formalize the Linder hypothesis that home demand determines the pattern of specialization and therefore predict that high-income locations export high-quality products. The factor-proportions model also predicts that skill-abundant, high-income locations export skill-intensive, high-quality products. Prior empirical evidence does not separate these explanations. I develop a model that nests both hypotheses and employ microdata on US manufacturing plants' shipments and factor inputs to quantify the two mechanisms' roles in quality specialization across US cities. Home-market demand explains as much of the relationship between income and quality as differences in factor usage.

Suggested Citation

Dingel, Jonathan I., The Determinants of Quality Specialization (October 2016). NBER Working Paper No. w22757, Available at SSRN: https://ssrn.com/abstract=2858067

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