Productivity, Quality and Exporting Behavior Under Minimum Quality Requirements ⁄

Abstract

We develop a model of international trade with two sources of flrm heterogeneity: \productivity and \caliber. Productivity is modeled as is standard in the literature. Caliber is the ability to produce quality using few flxed inputs. While there is no quality restriction to sell domestically, exporting requires the attainment of minimum quality levels. Compared to single-attribute models of flrm heterogeneity emphasizing either productivity or the ability to produce quality, our model provides a more nuanced characterization of flrms’ export behavior. In particular, it explains the empirical fact that flrm size is not monotonically related with export status; there are small flrms that export while there are large flrms 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 flndings conflrm the theoretical predictions.