Matching, Quality Upgrading, and Trade between Heterogeneous Firms
April 2009
Abstract
This paper analyzes trade between firms 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 final goods by improving matching of firms. The quality upgrading is decomposed as the short run effect of a reduction in the quality gap among parts and components and the long run effect of intensi ed competition among suppliers. Under the existence of fi xed trade costs, firms' 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 fi rms, though not all large and high quality fi rms engage in trade. Trade in intermediate goods improves the quality of even firms that do not import intermediate goods.
