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Flach, Lisandra (June 2017): A note on the isomorphism of heterogeneous firms models. In: Economics Letters, Vol. 155: pp. 24-27

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Since firm-level data has become available, many papers have studied the relative importance of production efficiency and product quality for firms' export success. Quality sorting models are considered to a large extent as a quality interpretation of the Melitz (2003) model: While firm-level prices decrease monotonically in production efficiency, firm-level prices increase monotonically with quality. Using firm level information on technology and quality upgrading investments, this paper discusses the isomorphism of heterogeneous firms models. The paper shows that, while the decision to increase product quality or markups within the firm may be firm and market specific, increases in production efficiency are only firm-specific. Hence, the general equilibrium solution of these models may be non-isomorphic.

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