Essays on product quality, international trade and welfare

Thesis

This dissertation consists of four related, sole-authored chapters. It considers the microeconomic mechanisms for gains from trade in the presence of quality investments by firms. It shows within the framework of a quality-augmented heterogeneous firms model that the quality dimension matters for welfare gains from trade. It also provides novel empirical evidence on adjustment mechanisms of aggregate quality as a consequence of globalization. To the best of my knowledge, this is the first contribution to provide a comprehensive analysis of the role of endogenous product quality in the determination of gains from trade.

I first offer an explanation for observed industry heterogeneity in trade-induced productivity gains and show that results depend on whether or not firms have the option to invest in quality. I then take a broader view of welfare gains from trade, looking beyond productivity improvements. I find that globalization can imply a quality-variety trade-off when consumer quality preference is strong - a finding which holds under firm heterogeneity and symmetry. Nevertheless, overall gains from trade are positive. With quality being itself an important channel for gains from trade, I also investigate the detailed mechanisms by which aggregate quality changes as a consequence of globalization. This is done within the same theoretical heterogeneous firms framework as well as empirically using firm-level export data matched with firm-level quality ratings. I argue that firm heterogeneity matters for gains from trade by giving rise to an additional welfare channel in the presence of variable elasticity of demand preferences: high quality firms expand sales disproportionately in a larger market, thereby raising aggregate quality. This theoretical prediction is confirmed by the data. Furthermore, I study the mechanisms for gains from trade in a symmetric firms version of the baseline model. This allows me to isolate the role of firm heterogeneity in driving earlier results. In addition, I analyse the efficiency properties of the market equilibrium for the symmetric firms case.

Authors: Baller, S

• Publication date: 2014
• DOI: 10.5287/ora-z687zgzpa
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: Oxford University, UK
• Language: English
• Keywords: international trade; JEL: L15; JEL: F15; JEL: L25; international economics; industrial organisation; JEL: L11; JEL: F14; JEL: F12; JEL: F61
• Subjects: Industrial economics; Innovation,productivity and growth; Macro and international economics; Economics; Econometrics