Matching, Quality Upgrading, and Trade between Heterogeneous Firms
April 2009
Abstract
This paper analyzes trade between rms that are heterogeneous in product quality in a simple general equilibrium model. The multi-sided heterogeneity of exporters and importers creates a new source of gains from trade. The opening of trade raises the quality of nal goods by improving matching of rms. The quality upgrading is decomposed as the short run e¤ect of a reduction in the quality gap among parts and components and the long run e¤ect of intensi ed competition among suppliers. Under the existence of xed trade costs, rms trade pattern is consistent with a variety of stylized facts that have not been explained in the conventional love of variety model. Firms selectively trade with those with similar sizes at similar quality levels. Both exporting and importing are concentrated into large and high quality rms, though not all large and high quality rms engage in trade. Trade in intermediate goods improves the quality of even rms that do not import intermediate goods.
