Productivity, quality and exporting behavior under minimum quality constraints

Abstract

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