Seminar Room 1, Espais de Recerca (ERE)

Duration: 30 minutes

Abstract: This paper builds a model that examines firm heterogeneity across two dimensions: productivity and quality. We show that when firms are able to choose their input quality and there exists a negative relationship between firm productivity and firm quality, this can lead to a non-unimodal distribution of quality across firms. Trade liberalization, represented by reductions in trade costs, and stronger vertical linkages, represented by an increase in the value added of intermediate goods, will shift the distribution of firms towards the modes of the distribution, which is what we term quality polarization. With this novel approach, we are able to explain empirical trade patterns as it relates to the product quality of exported goods.