My paper "Quality and gravity in international trade" (joint with Lisandra Flach) has been conditionally accepted for publication in the Journal of International Economics.
This paper introduces endogenous quality innovations in a multi-country model with heterogeneous firms. We show that quality investments reduce the impact of fixed costs on exports through adjustments on the extensive margin, whereas the elasticity with respect to variable costs remains unaffected. We find robust and consistent evidence for this effect of quality differ-entiation on the gravity equation, using aggregate trade data and Brazilian firm-level data. We apply our model and evaluate the impact of trade policies that reduce fixed export costs. Our results highlight that welfare gains are substantially lower and become much more dispersed across industries than predicted by heterogeneous firms models without quality differentiation.