Quality, Variable Markups, and Welfare: A Quantitative General Equilibrium Analysis of Export Prices

51 Pages Posted: 5 Mar 2018

See all articles by Haichao Fan

Haichao Fan

Fudan University - School of Economics

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies)

Sichuang Xu

Hong Kong University of Science and Technology (HKUST)

Stephen R. Yeaple

Pennsylvania State University - College of the Liberal Arts - Department of Economic; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2017

Abstract

Modern trade models attribute the dispersion of international prices to physical and man-made barriers to trade, to the pricing-to-market by heterogeneous producers, and to differences in the quality of output offered by firms. This paper analyzes a quantitative general equilibrium model that incorporates all three of these mechanisms. Estimating the model's parameters from Chinese firm-level trade data, we find that our model incorporating both endogenous quality and per unit trade costs implies lower gains from trade relative to the model without variable quality. This is because these costs, combined with "Washington Apples" effects, are a greater burden on the most productive firms and change the effective distribution of productivity. We also show that changes in specific trade costs induce larger shifts in export prices than do changes in ad valorem trade costs that equivalently restrict trade. The results highlight the importance of modeling "Washington Apples" effects in quantitative trade models.

Keywords: Quality, Welfare, Variable Markups, Export Price, “Washington Apples” Effect, Non-Homothetic Preferences, Specific Trade Costs, Heterogeneous Firms

JEL Classification: F12, F14

Suggested Citation

Fan, Haichao and Li, Yao Amber and Xu, Sichuang and Yeaple, Stephen R., Quality, Variable Markups, and Welfare: A Quantitative General Equilibrium Analysis of Export Prices (October 22, 2017). Available at SSRN: https://ssrn.com/abstract=3134321 or http://dx.doi.org/10.2139/ssrn.3134321

Haichao Fan

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies) ( email )

Department of Economics, Hong Kong U of Sci&Tech
Clear Water Bay, Kowloon, Hong Kong SAR, China
Kowloon
Hong Kong

HOME PAGE: http://yaoli.people.ust.hk/

Sichuang Xu

Hong Kong University of Science and Technology (HKUST) ( email )

Clear Water Bay
Hong Kong

Stephen R. Yeaple (Contact Author)

Pennsylvania State University - College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
8148655452 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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