Working Paper: CEPR ID: DP10555
Authors: Rosario Crin; Laura Ogliari
Abstract: An influential literature has documented large differences across countries and industries in terms of product quality. It is important to understand the determinants of these differences, because the production of high-quality goods influences key aspects of economic performance. In this paper, we propose and test an explanation that rests on the interplay between cross-country differences in financial frictions and cross-industry differences in financial vulnerability. We organize the empirical analysis around a trade model with heterogeneous firms, endogenous output quality, country heterogeneity in financial frictions, and industry heterogeneity in financial vulnerability. We estimate the model using novel and unusually rich data on export quality, financial development, and financial vulnerability, covering all manufacturing industries and countries in the world over the last three decades. Our results show that the interplay between financial frictions and financial vulnerability is a first-order determinant of the observed variation in product quality across countries and industries. We also show that quality adjustments are a key channel through which financial development affects international trade and shapes the industrial composition of countries' exports.
Keywords: Credit Market Imperfections; Export Structure; Financial Vulnerability; Product Quality
JEL Codes: F14; F36; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial development (O16) | average product quality (L15) |
| financial frictions (G19) | average product quality (L15) |
| financial vulnerability (G32) | average product quality (L15) |
| credit market imperfections (E44) | average product quality (L15) |
| better credit conditions (G21) | product quality upgrades (L15) |