Monopsony Power and Export Product Quality

Abstract

With mounting interest in the interaction between trade and imperfectly competitive labor markets, this paper proposes a novel product quality upgrading mechanism to link the two. This paper extends the Melitz model by incorporating monopsonistically competitive labor markets and firms' endogenous quality choices. The model predicts that firms produce and export high-quality products in response to increasing marginal costs stemming from labor market imperfection, which can be viewed as the generalized Washington apple effect. Using detailed Chinese firm production and export data, the empirical evidence confirms the model's prediction. Using the minimum wage and shift-share-based predicted migration as instrumental variables for firms' monopsony power, the empirical results further confirm the existence of the causality. Further analysis using quota cancellation under the Multifiber Arrangement as an exogenous demand shock finds that the impact of firms' monopsony power on their export product quality is stronger for firms experiencing output expansion.

Keywords: Product Quality, Monopsony Power, Washington Apple Effect, Increasing Marginal Cost