A growing literature suggests that high-income countries export high-quality goods. Two hypotheses may explain such specialization, with different implications for welfare, inequality, and trade policy. Fajgelbaum, Grossman, and Helpman (2011) formalize the Linder hypothesis that home demand determines the pattern of specialization and therefore predict that high-income locations export high-quality products. The factor-proportions model also predicts that skill abundant, high-income locations export skill intensive, high-quality products. Prior empirical evidence does not separate these explanations. I develop a model that nests both hypotheses and employ microdata on US manufacturing plants' shipments and factor inputs to quantify the two mechanisms' roles in quality specialization across US cities. Home-market demand explains at least as much of the relationship between income and quality as differences in factor usage.
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Product Quality and Firm Heterogeneity in International Trade
March 2013
Working Paper Number:
CES-13-08
I develop and implement a methodology for obtaining plant-level estimates of product quality from revenue and physical output data. Intuitively, firms that sell large quantities of output conditional on price are classified as high quality producers. I use this method to decompose cross-plant variation in price and export status into a quality and an efficiency margin. The empirical results show that prices are increasing in quality and decreasing in efficiency. However, selection into exporting is driven mainly by quality. The finding that changes in quality and efficiency have different impact on the firm's export decision is shown to be inconsistent with the traditional iceberg trade cost formulation and points to the importance of per unit transport costs.
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Materials Prices and Productivity
June 2012
Working Paper Number:
CES-12-11
There is substantial within-industry variation, even within industries that use and produce homogeneous inputs and outputs, in the prices that plants pay for their material inputs. I explore, using plant-level data from the U.S. Census Bureau, the consequences and sources of this variation in materials prices. For a sample of industries with relatively homogeneous products, the standard deviation of plant-level productivities would be 7% lower if all plants faced the same materials prices. Moreover, plant-level materials prices are both persistent across time and predictive of exit. The contribution of net entry to aggregate productivity growth is smaller for productivity measures that strip out di'erences in materials prices. After documenting these patterns, I discuss three potential sources of materials price variation: geography, di'erences in suppliers. marginal costs, and suppliers. price discriminatory behavior. Together, these variables account for 13% of the dispersion of materials prices. Finally, I demonstrate that plants.marginal costs are correlated with the marginal costs of their intermediate input suppliers.
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Export Prices of U.S. Firms
December 2011
Working Paper Number:
CES-11-42
Using confidential firm-level data from the United States in 2002, we show that exporting firms charge prices for narrowly defined goods that differ substantially with the characteristics of firms and export markets. We control for selection into export markets using a three-stage estimator. We have three main results. First, we find that that highly productive and skill intensive firms charge higher prices, while capital-intensive firms charge lower prices. Second, the very large correlation between distance and export prices found by Baldwin and Harrigan (2011) is largely due to a composition effect. Third, U.S. firms charge slightly higher prices to larger and richer markets, and substantially higher prices to markets other than Canada and Mexico.
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Has toughness of local competition declined?
May 2022
Working Paper Number:
CES-22-13
Recent evidence on rm-level markups and concentration raises a concern that market
competition has declined in the U.S. over the last few decades. Since measuring competition is difficult, methodologies used to arrive at these findings have merits but also raise technical concerns which question the validity of these results. Given the significance of documenting how competition has changed, I contribute to this literature by studying a different measure of competition. Specifically, I estimate the toughness of local competition over time. To derive this estimate, I use a generalized monopolistic competition model with variable markups. This model generates insights that allows me to measure competition as the sensitivity of weighted-average markup to changes in the number of competitors using directly observable variables. Compared to firm-level markups estimation, this method relaxes the need to estimate production functions. I then use confidential Census data to estimate toughness of local competition from 1997 to 2016, which shows that local competition has decreased in non-tradable industries on average in the U.S. during this time period.
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THE MARGINS OF GLOBAL SOURCING: THEORY AND EVIDENCE FROM U.S. FIRMS
December 2014
Working Paper Number:
CES-14-47
This paper studies the extensive and intensive margins of firms' global sourcing decisions. We develop a quantifiable multi-country sourcing model in which heterogeneous firms self-select into importing based on their productivity and country-specific variables. The model delivers a simple closed-form solution for firm profits as a function of the countries from which a firm imports, as well as those countries' characteristics. In contrast to canonical models of exporting in which firm profits are additively separable across exporting markets, we show that global sourcing decisions naturally interact through the firm's cost function. In particular, the marginal change in profits from adding a country to the firm's set of potential sourcing locations depends on the number and characteristics of other countries in the set. Still, under plausible parametric restrictions, selection into importing features complementarity across markets and firms' sourcing strategies follow a hierarchical structure analogous to the one predicted by exporting models. Our quantitative analysis exploits these complementarities to distinguish between a country's potential as a marginal cost-reducing source of inputs and the fixed cost associated with sourcing from this country. Counterfactual exercises suggest that a shock to the potential benefits of sourcing from a country leads to significant and heterogeneous changes in sourcing across both countries and firms.
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Multi-Product Firms and Trade Liberalization
August 2009
Working Paper Number:
CES-09-21
This paper develops a general equilibrium model of international trade that features selection across firms, products and countries. Firms' export decisions depend on a combination of firm 'productivity' and firm-product-country 'consumer tastes', both of which are stochastic and unknown prior to the payment of a sunk cost of entry. Higher-productivity firms export a wider range of products to a larger set of countries than lower-productivity firms. Trade liberalization induces endogenous reallocations of resources that foster productivity growth both within and across firms. Empirically, we find key implications of the model to be consistent with U.S. trade data.
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The Modern Wholesaler: Global Sourcing, Domestic Distribution, and Scale Economies
December 2018
Working Paper Number:
CES-18-49
Nearly half of all transactions in the $6 trillion market for manufactured goods in the United
States were intermediated by wholesalers in 2012, up from 32 percent in 1992. Seventy percent of this increase is due to the growth of 'superstar' firms - the largest one percent of wholesalers. Structural estimates based on detailed administrative data show that the rise of the largest wholesalers was driven by an intuitive linkage between their sourcing of goods from abroad and an expansion of their domestic distribution network to reach more buyers. Both elements require scale economies and lead to increased wholesaler market shares and markups. Counterfactual analysis shows that despite increases in wholesaler market power, intermediated international trade has two benefits for buyers: directly through buyers' valuation of globally sourced products, and indirectly through the passed-through benefits of wholesaler economies of scale and increased quality.
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MANAGING TRADE: EVIDENCE FROM CHINA AND THE US
May 2019
Working Paper Number:
CES-19-15
We present a heterogeneous-firm model in which management ability increases both production efficiency and product quality. Combining six micro-datasets on management practices, production and trade in Chinese and American firms, we find broad support for the model's predictions. First, better managed firms are more likely to export, sell more products to more destination countries, and earn higher export revenues and profits. Second, better managed exporters have higher prices, higher quality, and lower quality-adjusted prices. Finally, they also use a wider range of inputs, higher quality and more expensive inputs, and imported inputs from more advanced countries. The structural estimates indicate that management is important for improving production efficiency and product quality in both countries, but it matters more in China than in the US, especially for product quality. Panel analysis for the US and a randomized control trial in India suggest that management exerts causal effects on product quality, production efficiency, and exports. Poor management practices may thus hinder trade and growth, especially in developing countries.
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Wholesalers and Retailers in U.S. Trade (Long Version)
February 2012
Working Paper Number:
CES-12-03
International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which U.S. exports and imports flow through wholesalers and retailers versus producing and consuming firms.
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Factor Price Equality and the Economies of the United States
October 2005
Working Paper Number:
CES-05-21
We develop a methodology for identifying departures from relative factor price equality across regions that is valid under general assumptions about production, markets and factors. Application of this methodology to the United States reveals substantial and increasing deviations in relative skilled wages across labor markets in both 1972 and 1992 . These deviations vary systematically with labor markets' industry structure both in cross section and over time.
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