Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Quality Uncertainty and Intermediation in International Trade

Kunal Dasgupta, Jordi Mondria

Last modified: 2012-07-27


In this paper, we examine how the exporting decision and quality choice of producers are affected in the presence of quality uncertainty. We develop a dynamic, two-countrymodel where a foreign consumer learns the quality of a home product only after he has consumed it. As a result, home exporters need to establish reputation about their product in the foreign market. In equilibrium, firm-specific fixed exporting cost arises endogenously; it consists of (i) the cost of establishing reputation in the export market and (ii) the opportunity cost of exporting due to the choice of sub-optimal quality in the home market. The model generates a non-monotonic relationship between firm size and export status, and is consistent with the presence of many small exporters and observed export dynamics. We use the model to analyze the impact of trade intermediaries. By using intermediaries, exporters can avoid the reputation cost in lieu of a higher per unit cost. We show that the effect of intermediaries on the choice of quality and price is much more nuanced compared to what a model with an exogenous intermediation technology would suggest.

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