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Estimating firm product quality using trade data

Paul Piveteau and Gabriel Smagghue

Journal of International Economics, 2019, vol. 118, issue C, 217-232

Abstract: We propose a new instrumental variable strategy to estimate product quality at the firm-level, using trade data. Interacting firm importing shares by country with real exchange rates (RER), we obtain a cost shifter that varies across firms and is arguably orthogonal to product quality. We use this import weighted RER as an instrument for export prices and we identify firm-level quality from residual export variations, after controlling for prices. Our quality estimates correlate to firm characteristics (e.g. wages) and to alternative measures of quality available for some rare sectors. Moreover, we document cases in which our estimates more adequately characterize quality compared to prices, a popular proxy for quality. We show for instance that firms add products to their export portfolio when their quality increases, as expected, while simultaneously their prices decrease. This suggests that our empirical strategy, by delivering quality estimates which, unlike prices, are not polluted with productivity variations, should contribute to future research on the link between firm-level product quality and globalization.

Keywords: International trade; Product quality; Demand estimation (search for similar items in EconPapers)
JEL-codes: F1 F14 L1 (search for similar items in EconPapers)
Date: 2019
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