Working Paper: NBER ID: w19992
Authors: Ana Cecilia Fieler; Marcela Eslava; Daniel Xu
Abstract: We develop a model of international trade with heterogeneous firms and endogenous quality choices. Producing higher quality involves returns to scale, it is intensive in skilled labor and high-quality inputs. Firms' quality choices are interrelated because firms sell their goods to consumers and to other firms. We estimate the model using data on manufacturing plants in Colombia before the trade liberalization, simulate a counterfactual liberalization and compare the results to post-liberalization data. Like other unilateral trade liberalizations in developing countries, the skill premium and skill intensity in manufacturing increased, and the size of firms decreased in Colombia. In the model, lower tariffs lead importers and exporters to upgrade quality, increasing the domestic demand and supply of high-quality inputs. Other firms then upgrade their own product quality, thereby amplifying these effects of domestic inputs. Relative demand for skilled labor increases in a wide range of firms, despite a contraction in sales.
Keywords: Trade; Quality Upgrading; Skills; Colombia
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | quality upgrading (L15) |
| quality upgrading (L15) | demand for skilled labor (J24) |
| Trade liberalization (F13) | demand for skilled labor (J24) |
| Quality upgrading by one firm (L15) | quality upgrading by other firms (L15) |
| Trade liberalization (F13) | domestic demand for high-quality inputs (R22) |
| Decrease in firm sales (D21) | increase in demand for skilled labor (J24) |