Quality and gravity in international trade

Flach, Lisandra und Unger, Florian (2022): Quality and gravity in international trade. In: Journal of International Economics, Vol. 137, 103578

Abstract

This paper introduces endogenous quality innovations in a multi-country model with heterogeneous firms. We show that quality investments lead to an additional margin of adjustment in the gravity equation. In industries with a high scope for quality differentiation, the elasticity of bilateral exports with respect to fixed costs is lower due to adjustments at the extensive margin, whereas the elasticity with respect to variable costs remains unaffected. We find robust and consistent evidence for the effect of quality differentiation on the gravity equation, using aggregate trade data and Brazilian firm-level data. We apply our model and evaluate the impact of trade policies that reduce fixed export costs. Our results highlight that trade and welfare effects are substantially lower and become much more dispersed across industries than predicted by heterogeneous firm models without quality differentiation. (C) 2022 Elsevier B.V. All rights reserved.

• Item Type: Journal article
• Faculties: Economics > Chairs > CESifo-Professorship for International Trade
• Subjects: 300 Social sciences > 330 Economics
• ISSN: 0022-1996
• Language: English