A Product-Quality View of the Linder Hypothesis

The Linder hypothesis states that countries of similar income per capita should trade more intensely with one another. This hypothesis has attracted substantial research over decades, but the empirical evidence has failed to provide consistent support for it. This paper shows that the reason for the failure is the use of an inappropriate empirical benchmark, the gravity equation estimated using trade data aggregated across sectors. The paper builds a theoretical framework in which, as in Linder's theory, product quality plays the central role. A formal derivation of the Linder hypothesis is obtained, but this hypothesis is shown to hold only if it is formulated as a sector-level prediction. The "sectoral Linder hypothesis" is then estimated on a sample of 64 countries in 1995. The results support the prediction: after controlling for inter-sectoral determinants of trade, countries of similar per-capita income trade more intensely with one another. The paper also shows that a systematic aggregation bias explains the failure of the previous empirical literature to find support for Linder's theory.

Specialization, Factor Accumulation and Development

We estimate the effect of factor proportions on the pattern of manufacturing specialization in a cross-section of OECD countries, taking into account that factor accumulation responds to productivity. We show that the failure to control for productivity differences produces biased estimates. Our model explains 2/3 of the observed differences in the pattern of specialization between the poorest and richest OECD countries. However, because factor proportions and the pattern of specialization co-move in the development process, their strong empirical relationship is not sufficient to determine whether specialization is driven by factor proportions, or by other mechanisms also correlated with level of development.

Productivity, quality and exporting behavior under minimum quality constraints

We develop a model of international trade with two sources of firm heterogeneity: "productivity" and "caliber". Productivity is modeled as is standard in the literature. Caliber is the ability to produce quality using few fixed inputs. While there is no quality restriction to sell domestically, exporting requires the attainment of minimum quality levels. Compared to single-attribute models of firm heterogeneity emphasizing either productivity or the ability to produce quality, our model provides a more nuanced characterization of firms' export behavior. In particular, it explains the empirical fact that firm size is not monotonically related with export status; there are small firms that export while there are large firms that only operate in the domestic market. The model also delivers novel testable predictions. Conditional on size, exporters sell products of higher quality and at higher prices, they pay higher wages and use capital more intensively. We test these predictions using data on manufacturing establishments in India, the U.S., Chile, and Colombia. The empirical findings confirm the theoretical predictions.Productivity; quality; exports; firm heterogeneity

Specialization, Factor Accumulation and Development

The Heckscher-Ohlin theory links specialization of production to relative factor endowments. Endowments are the result of accumulation in response to economic in-centives. Taking this into account allows us to reconcile wildly di¤erent predictions in the empirical literature about the e¤ect of capital accumulation on manufacturing output. We estimate the e¤ect of factor proportions on specialization in a cross-section of OECD countries. We show that using the estimation results alone, we cannot dis-tinguish between specialization driven by factor proportions, and specialization that is correlated with factor proportions for other reasons. But our results are consistent with evidence on sectoral factor intensities, which supports the H-O theory. Moreover, our model does a good job of predicting the substantial reallocation that takes place within manufacturing as countries grow. It explains 2/3 of the observed di¤erence in the pattern of specialization between the poorest and richest OECD countries.

Fooling Ourselves: Evaluating the Globalization and Growth Debate

This paper evaluates how much of the economics profession has evaluated the evidence on the relationship between international trade and economic growth. The paper highlights the basic approaches to the trade and growth question that the literature has adopted. The case is made that more attention needs to be paid to the mechanisms by which trade impacts growth and that future research should move away from a focus on outcomes and look instead at these mechanisms.

A Product-Quality View of The Linder Hypothesis

The Linder hypothesis states that countries of similar income per capita should trade more intensely with one another. This hypothesis has attracted substantial research over decades, but the empirical evidence has failed to provide consistent support for it. This paper shows that the reason for the failure is the use of an inappropriate empirical benchmark, the gravity equation estimated using trade data aggregated across sectors. The paper builds a theoretical framework in which, as in Linder’s theory, product quality plays the central role. A formal derivation of the Linder hypothesis is obtained, but this hypothesis is shown to hold only if it is formulated as a sector-level prediction. The “sectoral Linder hypothesis” is then estimated on a sample of 64 countries in 1995. The results support the prediction: after controlling for inter-sectoral determinants of trade, countries of similar per-capita income trade more intensely with one another. The paper also shows that a systematic aggregation bias explains the failure of the previous empirical literature to find support for Linder’s theory.http://deepblue.lib.umich.edu/bitstream/2027.42/49537/1/IPC-working-paper-024-Hallak.pd

Product Quality, Linder, and the Direction of Trade

A substantial amount of theoretical work predicts that quality plays an important role as a determinant of the global patterns of bilateral trade. This paper develops an empirical framework to estimate the empirical relevance of this prediction. In particular, it identifies the effect of quality operating on the demand side through the relationship between per capita income and aggregate demand for quality. The model yields predictions for bilateral flows at the sectoral level, and is estimated using cross-sectional data for bilateral trade among 60 countries in 1995. The empirical results confirm the theoretical prediction: rich countries tend to import relatively more from countries that produce high quality goods. The paper also shows that a severe aggregation bias explains the failure of the literature so far to find consistent empirical support for the "Linder hypothesis", the conjectured corollary to the first theory relating product quality and the direction of trade.

Equilibrium Demand Elasticities across Quality Segments

Empirical studies find substantial differences in demand elasticities and associated markups among products of different quality. This paper analyzes the theoretical determinants of such variation. We present a simple model that allows for horizontal and vertical differentiation and accounts for endogenous entry. We find that most economic forces in our model, such as consumers’ price sensitivity, the scope for product differentiation, and sunk costs of entry, are likely to induce lower equilibrium demand elasticities for higher quality products. In contrast, other economic forces, such as marginal cost of production and the distribution (across consumers) of the willingness to pay for quality, may induce the opposite pattern. These results provide an organizing framework through which empirical findings may be interpreted, and may also help to predict variation in demand elasticities for markets in which empirical estimates of elasticities are unavailable or infeasible to obtain.

Challenges of Exporting Differentiated Products to Developed Countries: The Case of SME-Dominated Sectors in a Semi-Industrialized Country

This paper surveys four Argentinean industries—light ships, television programs, wines, and wooden furniture—that have experienced substantial export growth in recent years, particularly to developed countries. The case studies first describe the structure of the industries, then characterize the emergence of export pioneers and the subsequent process of diffusion. Finally, they analyze the role played by public institutions. Across sectors, the appearance of a pioneer is largely explained by a knowledge advantage relative to other industry participants regarding foreign markets, which the pioneer acquired previously and independently of his decision to export. Diffusion occurs across as well as within sectors, as pioneers’ knowledge is relevant to other industries. Since diffusion does not necessarily hurt the pioneer, public policy has a potentially important role in fostering diffusion within and across sectors.Small and Medium Enterprises, Exports, Argentina

Firms' Exporting Behavior under Quality Constraints

We develop a model of international trade with export quality requirements and two dimensions of firm heterogeneity. In addition to "productivity", firms are also heterogeneous in their "caliber" -- the ability to produce quality using fewer fixed inputs. Compared to single-attribute models of firm heterogeneity emphasizing either productivity or the ability to produce quality, our model provides a more nuanced characterization of firms' exporting behavior. In particular, it explains the empirical fact that firm size is not monotonically related with export status: there are small firms that export and large firms that only operate in the domestic market. The model also delivers novel testable predictions. Conditional on size, exporters are predicted to sell products of higher quality and at higher prices, pay higher wages and use capital more intensively. These predictions, although apparently intuitive, cannot be derived from single-attribute models of firm heterogeneity as they imply no variation in export status after size is controlled for. We find strong support for the predictions of our model in manufacturing establishment datasets for India, the U.S., Chile, and Colombia.