DP6368 Zeros, Quality and Space: Trade Theory and Trade Evidence

Author(s): Richard Baldwin, James Harrigan
Publication Date: June 2007
Date Revised: January 2010
Keyword(s): Heterogeneous-firm trade models, QHFT model, Quality and trade, Testing trade theories
JEL(s): F0, F11, F12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6368

Bilateral, product-level data exhibit a number of strong patterns that can be used to evaluate international trade theories, notably the spatial incidence of "export zeros" (correlated with distance and importer size), and of export unit values (positively related to distance). We show that leading theoretical trade models fail to explain at least some of these facts, and propose a variant of the Melitz model that can account for all the facts. In our model, high quality firms are the most competitive, with heterogeneous quality increasing with firms? heterogeneous cost.