GEP Research Paper 08/44
Quality Selection, Chinese Exports and Theories of Heterogeneous Firm Trade
Richard Kneller and Zhihong Yu
Summary
This paper
develops a new heterogeneous firm model of international trade in which
firms differ in their product quality and vary their prices across
according to the level of competition. This new model is consistent
with evidence that we present on the spatial distribution of Chinese
export prices.
Abstract
Recent models of international trade have identified product quality as an important determinant of bilateral trade flows. Yet relatively little is understood about the relationship between the characteristics of the export market and the quality of products. In this paper we examine this link using Chinese data. We find evidence that product unit values vary with standard gravity variables in a different manner across sectors of the Chinese economy, and run contrary to earlier findings for the U.S. These results are not compatible with existing heterogeneous firm trade models such as Melitz (2003) model and its extension to include product quality by Baldwin and Harrigan (2007). To explain these differences we propose a heterogeneous firm trade model with quality differences and spatial price discrimination based on Melitz and Ottaviano (2007).
JEL classification: F1, F12
Keywords: product quality, heterogeneous firms, Chinese exports
Issued in November 2008
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