Working Paper: NBER ID: w10877
Authors: Juan Carlos Hallak
Abstract: A substantial amount of theoretical work predicts that quality plays an important role as a determinant of the global patterns of bilateral trade. This paper develops an empirical framework to estimate the empirical relevance of this prediction. In particular, it identifies the effect of quality operating on the demand side through the relationship between per capita income and aggregate demand for quality. The model yields predictions for bilateral flows at the sectoral level, and is estimated using cross-sectional data for bilateral trade among 60 countries in 1995. The empirical results confirm the theoretical prediction: rich countries tend to import relatively more from countries that produce high quality goods. The paper also shows that a severe aggregation bias explains the failure of the literature so far to find consistent empirical support for the "Linder hypothesis", the conjectured corollary to the first theory relating product quality and the direction of trade.
Keywords: Product Quality; International Trade; Linder Hypothesis
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| per capita income (D31) | demand for quality (L15) |
| demand for quality (L15) | trade flows from higher quality producers (F14) |
| per capita income + exporter quality (F14) | demand for quality (L15) |
| demand for quality (L15) | trade patterns (F10) |
| exporter income per capita (F40) | quality (L15) |
| quality (L15) | trade patterns in differentiated goods (F12) |
| aggregation bias (C43) | quality effect (L15) |