Zeros, Quality and Space: Trade Theory and Trade Evidence

Richard Baldwin and James Harrigan ()

No 6368, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Product-level data on bilateral U.S. exports exhibit two strong patterns. First, most potential export flows are not present, and the incidence of these "export zeros" is strongly correlated with distance and importing country size. Second, export unit values are positively related to distance. We show that every well-known multi-good general equilibrium trade model is inconsistent with at least some of these facts. We also offer direct statistical evidence of the importance of trade costs in explaining zeros, using the long-term decline in the relative cost of air shipment to identify a difference-in-differences estimator. To match these facts, we propose a new version of the heterogeneous-firms trade model pioneered by Melitz (2003). In our model, high quality firms are the most competitive, with heterogeneous quality increasing with firms’ heterogeneous cost.

Keywords: Heterogeneous-firm trade models; QHFT model; Quality and trade; Testing trade theories (search for similar items in EconPapers)
JEL-codes: F0 F11 F12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2007-06
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