Product Quality and Firm Heterogeneity in International Trade

In this paper, I develop and estimate a tractable general equilibrium model of international trade that includes endogenous quality choice among heterogeneous firms. The framework predicts that high productivity firms choose to produce high quality varieties and self-select into the export market. I find support for the model's predictions in U.S. Census microdata on manufacturing establishments. Using a new proxy for product quality obtained from price and quantity information, I show that quality and productivity are positively correlated, and that prices are increasing in product quality and decreasing in productivity. Further, consistent with the model, I find that exporters charge prices on average 6 percent higher than domestic producers and show that differences in quality and productivity explain about 75 percent of the exporter price premium. These results suggests that studying the firm's quality decision would lead to an improved understanding of the effect of market characteristics and trade policies on welfare and aggregate trade flows.

current draft.