Firms' Exporting Behavior under Quality Constraints

We develop a model of international trade with two dimensions of firm heterogeneity and export quality constraints that manifest as higher variable trade costs for lower quality firms. In addition to "productivity", firms are also heterogeneous in their "caliber" -- the ability to develop high-quality products with lower fixed outlays. The model predicts various conditional exporter premia. Conditional on size, exporters sell higher quality products, charge higher prices, pay higher input prices and higher wages, and use capital more intensively. Some of these predictions have already been documented in the empirical literature. However, although they are apparently an intuitive implication of single-attribute models, conditional exporter premia cannot be rationalized through these models as they imply no variation in export status once size is controlled for. We test these predictions using manufacturing establishment data for India, the U.S., Chile, and Colombia, and find strong support for the model. We also investigate the sources of export quality constraints using firm-level trade shipment data for the U.S. and India. Destination per-capita income plays a key role for firms in India. For firms in the U.S., both distance and destination per-capita income play a role, though the effect of per-capita income is about a third of its magnitude for India.