Firms’ Exporting behavior under quality constraints

Abstract

We develop a model of international trade with export quality requirements and two dimen- sions of rm heterogeneity. In addition to \productivity", rms are also heterogeneous in their \caliber" { the ability to produce quality using fewer xed inputs. Compared to single-attribute models of rm heterogeneity emphasizing either productivity or the ability to produce quality, our model provides a more nuanced characterization of rms' exporting behavior. In particular, it explains the empirical fact that rm size is not monotonically related with export status: there are small rms that export and large rms that only operate in the domestic market. The model also delivers novel testable predictions. Conditional on size, exporters are predicted to sell products of higher quality and at higher prices, pay higher wages and use capital more inten- sively. These predictions, although apparently intuitive, cannot be derived from single-attribute models of rm heterogeneity as they imply no variation in export status after size is controlled for. We nd strong support for the predictions of our model in manufacturing establishment datasets for India, the U.S., Chile, and Colombia.