Zeros, Quality and Space: Trade Theory and Trade Evidence
Richard E. Baldwin
University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w13214
Bilateral, product-level data exhibit a number of strong patterns that can be used to evaluate international trade theories, notably the spatial incidence of "export zeros" (correlated with distance and importer size), and of export unit values (positively related to distance). We show that leading theoretical trade models fail to explain at least some of these facts, and propose a variant of the Melitz model that can account for all the facts. In our model, high quality firms are the most competitive, with heterogeneous quality increasing with firms' heterogeneous cost.
Number of Pages in PDF File: 61
Date posted: July 3, 2007