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Introduction            The Model            Equilibrium        Results        Conclusion               World Trade Patter...
Introduction                The Model               Equilibrium              Results                Conclusion            ...
Introduction                The Model              Equilibrium              Results               ConclusionTheoretical li...
Introduction               The Model              Equilibrium            Results               ConclusionEvidence (II)    ...
Introduction               The Model               Equilibrium             Results               ConclusionEvidence (II)  ...
Introduction               The Model              Equilibrium            Results              ConclusionContribution      ...
Introduction               The Model                       Equilibrium                    Results              ConclusionC...
Introduction                The Model                 Equilibrium      Results   ConclusionProduction        Firm i is defi...
Introduction               The Model                    Equilibrium                Results   ConclusionProfit Maximization ...
Introduction              The Model                  Equilibrium                         Results   ConclusionOptimal Quant...
Introduction                The Model                           Equilibrium               Results   ConclusionEntry       ...
Introduction                The Model              Equilibrium            Results              ConclusionExit & partitioni...
Introduction                The Model                Equilibrium                 Results           ConclusionFirms Distrib...
Introduction               The Model                 Equilibrium                    Results      ConclusionCutoff function...
Introduction               The Model              Equilibrium            Results                ConclusionAggregates      ...
Introduction         The Model                   Equilibrium                Results        ConclusionCalibration          ...
Introduction         The Model   Equilibrium   Results   ConclusionFirms Distribution
Introduction         The Model                            Equilibrium                            Results                  ...
Introduction                     The Model                            Equilibrium                        Results         C...
Introduction                 The Model                  Equilibrium                   Results                   Conclusion...
Introduction                 The Model             Equilibrium                Results             ConclusionTotal Trade Va...
Introduction                The Model               Equilibrium               Results            ConclusionEndogenous qual...
Introduction         The Model            Equilibrium   Results   ConclusionEndogenous quality - a representative product ...
Introduction               The Model              Equilibrium             Results              ConclusionConclusion       ...
Introduction               The Model                                                  Equilibrium                         ...
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Cristiana Benedetti Fasil, Teodora Borota. World Trade Patterns and Prices: The Role of Productivity and Quality Heterogeneity

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Cristiana Benedetti Fasil (UCL)
Teodora Borota (Uppsala University)

Bank of Estonia
May 24, 2012

Published in: Economy & Finance
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Cristiana Benedetti Fasil, Teodora Borota. World Trade Patterns and Prices: The Role of Productivity and Quality Heterogeneity

  1. 1. Introduction The Model Equilibrium Results Conclusion World Trade Patterns and Prices: The Role of Productivity and Quality Heterogeneity Cristiana Benedetti Fasil (UCL) Teodora Borota (Uppsala University) Bank of Estonia May 24, 2012
  2. 2. Introduction The Model Equilibrium Results Conclusion Data on product level export and import prices has been exploited as evidence of countries technological development, trade specialization and demand schedules Facts on world trade patterns and prices have been established On top of that interest, empirical studies attempt to test the validity of the new trade theory that relies on firm heterogeneity and firm selection We attempt to reconcile the theoretical alternatives and match two sets of evidence: ⇒ Exporting strategies and pricing within a country ⇒ World trade patterns and prices What is the role of firms’ productivity - quality and efficiency?
  3. 3. Introduction The Model Equilibrium Results ConclusionTheoretical literature and Evidence (I) Melitz (2003): higher productivity/profitability/export success - lower prices Baldwin and Harrigan (2007): product quality higher productivity/profitability/export success - higher prices The truth lies somewhere in between Baldwin and Ito (2008) identify three types of products - (1) price increases with "difficulty" of the export market (quality-competition goods), (2) price-difficulty relationship is negative (price-competition) and (3) can not be placed in either category The share of (3) lines is lower for developed countries, the share of (1) lines rises with the development of the country Crozet et al. (2011) find similar results and also that for highly priced product lines (assumingly high quality ones) the price competition seems to be in place
  4. 4. Introduction The Model Equilibrium Results ConclusionEvidence (II) Trade patterns and intensities within and across regions of the North and the South (developed N, and developing S) The most intense trade flows are N-N, then N-S and S-S Product quality as determinant of trade specialization between N and S
  5. 5. Introduction The Model Equilibrium Results ConclusionEvidence (II) Export prices increase with income per capita of the origin (Schott (2004) for US) N specializes in the production of relatively higher quality Import prices are positively related to income per capita (Fieler, 2007) For a given exporter, import prices are positively related to income per capita (Fieler, 2007) N consumes relatively higher quality Melitz (2003): negative relation between export prices and income per capita/technology Baldwin and Harrigan (2007): negative relationship between income per capita and import prices, also conditional on exporter
  6. 6. Introduction The Model Equilibrium Results ConclusionContribution Model of industry and a space of products distributed over efficiency and quality dimensions We introduce a separate measure of cost efficiency which affects the marginal cost independently of the quality We use homothetic preferences (standard CES, quality augmented) and turn to supply side for the reasons of differences in demand schedules Fixed costs result in firms partitioning and thus different demand schedules across regions Price distribution determined by partitioning in efficiency - quality space which have the opposite effect on price ⇒ Generate trade patterns and prices consistent with evidence
  7. 7. Introduction The Model Equilibrium Results ConclusionConsumer Problem - Homothetic Preferences 2 regions; 2 symmetric countries in each region: 2N-2S Preferences are the same in all 4 countries For J = {N, S} 1 α max (qt (i)xt (i))α di s.t. EtJ = pt (i)xt (i)di x i∈I J i∈I J XtJ where I N = I ND + I NN + 2I SN and I S = I SD + I SS + 2I NS ⇒ Demand for each good i of quality q(i): 1 PtJ qtα (i) 1−α xt (i) = XtJ pt (i)
  8. 8. Introduction The Model Equilibrium Results ConclusionProduction Firm i is defined by: (a(i), q(i)), a(i) is labor efficiency q(i) is the quality of the variety Production technology is xt (i) = At (i)nt (i) with two dimensions of productivity: χ At (i) = at (i)qt (i)−η ⇒ higher quality varieties are more difficult to produce ⇒ asymmetry between firm’s cost efficiency and product quality
  9. 9. Introduction The Model Equilibrium Results ConclusionProfit Maximization Domestic market: πtJD (a, q) = ptJD xtD − wtJ ntD − w J cf Foreign market: πtJX (a, q) = ptJX xtX − wtJ ntX − w J cex where wN = 1 numeraire π N = π ND + max{0, π NN } + 2 max{0, π NS } π S = π SD + max{0, π SS } + 2 max{0, π SN }
  10. 10. Introduction The Model Equilibrium Results ConclusionOptimal Quantities ⇒ Monopolistic price - pricing quality: wtJ qtη (i) ptJD (a(i), q(i)) = χ αat (i) ⇒ Production: χ 1 αat (i)P J 1−α xtJ (a(i), q(i)) = XtJ qt (i)η−α w J ⇒ Profits: χ α αat (i)qt (i)1−η 1−α 1 πt (a(i), q(i)) = (1 − α)Pt1−α Xt − wcf . w
  11. 11. Introduction The Model Equilibrium Results ConclusionEntry Sunk entry cost, ce , expressed in terms of labor Firms draw productivity and quality from a distribution GJ (a, q), with density g J (a, q) g N (a, q) is log-normal and exogenous g S (a, q|µN ) is log-normal but the mean of g S is a constant fraction θ of the mean of the surviving firms in the North, µN Free-entry condition N Π = π N (a, q)g N (a, q)dqda = w N ce , N ax (q) Q S Π = π S (a, q)g S (a, q|µN )dqda = w S ce . S ax (q) Q
  12. 12. Introduction The Model Equilibrium Results ConclusionExit & partitioning Firms exit when the profits are not enough to cover the fixed operational cost, cf Exit cut-off functions for given q ∈ Q for both North and South: For a given q: low ’a’ firms exit intermediate ’a’ firms sell only at home high ’a’ sell at home and abroad (partition assured by the conditions on the fixed costs)
  13. 13. Introduction The Model Equilibrium Results ConclusionFirms Distribution Density of firms conditional on successful entry g(a,q) 1−G(ax (q),q) if a(q) ≥ ax (q) µ(a, q) = 0 otherwise J J Pin = 1 − G(ax (q), q) is the ex-ante probability of surviving JJ,K JJ,K 1−G(aex (q),q) Pex = J is the ex-ante probability that successful firms export, 1−G(ax (q),q) defined for all possible export origins and destinations (N-N, N-S, S-N and S-S)
  14. 14. Introduction The Model Equilibrium Results ConclusionCutoff functions For given q ∈ Q for both North and South: Exit cutoffs, depend on the own country aggregate: 1−α 1 J w J cf α 1 wJ χ ax (q) = α (1 − α)P J 1−α EJ α q 1−η Export cutoffs, depend on the foreign country aggregates: 1−α 1 JJ w J cex α 1 wJτ χ aex (q) = α (1 − α)P J 1−α EJ α q 1−η 1−α 1 JK w J cex α 1 wJτ χ aex (q) = α (1 − α)P K 1−α K E α q 1−η
  15. 15. Introduction The Model Equilibrium Results ConclusionAggregates The mass of incumbents in each country, I, is pinned down by the labor market clearing condition and it represents the measure of varieties produced The mass of exporting firms (varieties) Iex = Pex I Mass of available varieties in each country is given by the mass of varieties produced domestically plus the mass of varieties imported from the other three regions, e.g. for one North region M N = I N + Iex + 2Iex NN SN
  16. 16. Introduction The Model Equilibrium Results ConclusionCalibration Targets Data Model North-North Export Share 52.69% 54.95% North-South Export Share 40.86% 42.49% North Exit Rate 10% 10.43% South Exit Rate 20% 23.43% Wage Ratio w s /w N 0.4 0.41 Calibrated Parameters θ 0.18 σ 0.5 cf 11.42% of avg North domestic employment cex 29.51% of avg North domestic employment ce 38% of avg North domestic employment Other Parameters α 0.73 χ 0.5 η 0.86 δ 0.5% τ 1 gN 4.1 LN = LS 1
  17. 17. Introduction The Model Equilibrium Results ConclusionFirms Distribution
  18. 18. Introduction The Model Equilibrium Results ConclusionFirms Partitioning Export to North and South NORTH 150 Export to North Domestic Exit quality 100 50 0 0 20 40 60 80 100 120 140 160 180 productivity SOUTH 150 quality 100 50 0 20 40 60 80 100 120 140 160 180 productivity
  19. 19. Introduction The Model Equilibrium Results ConclusionDistribution of Prices 180 160 140 120 100 quality 80 Domestic Export Export to Exit market to North and North South 60 40 20 0 20 40 60 80 100 120 140 160 180 200 productivity Average Price North South Exports 4.0739 0.9495 Imports 1.0072 0.9101 Imports from North 4.2514 3.9861 Imports from South 1.0008 0.9054
  20. 20. Introduction The Model Equilibrium Results ConclusionDistribution of Expenditure over Quality 5 Expenditure share per variety over quality x 10 5 North 4.5 South 4 3.5 3 2.5 2 1.5 1 0.5 0 0 20 40 60 80 100 120 140 160 180 200 quality
  21. 21. Introduction The Model Equilibrium Results ConclusionTotal Trade Values: Imports+Exports 4 Value of total trade x 10 16 N−N 14 S−S N−S 12 10 8 6 4 2 0 0 20 40 60 80 100 120 140 160 180 200 quality
  22. 22. Introduction The Model Equilibrium Results ConclusionEndogenous quality - a representative product line a representative product line - a reduced form model, one productivity dimension taking into account distribution of firms quality as a function of efficiency - increasing, but at a decreasing rate for higher values of efficiency β q(a) = aea−a (1) price is not a monotonic function of efficiency (and quality) β p(a) = e(a−a )χ (2) profits are increasing in efficiency β Π = aea−a (3)
  23. 23. Introduction The Model Equilibrium Results ConclusionEndogenous quality - a representative product line
  24. 24. Introduction The Model Equilibrium Results ConclusionConclusion Four countries N-S trade model with two-dimensional firm heterogeneity and firms distribution that matches stylized facts on world trade patterns Allows to match data on the export/import prices in relation to income per capita Positive relation between income per capita and import prices, conditional on exporter Generate differences between the consumption bundles of N and S even with homothetic preferences North consume more high quality South consume more low quality
  25. 25. Introduction The Model Equilibrium Results ConclusionProfits ⇒ Profits: χ α αat (i)qt (i)1−η 1−α 1 πt (a(i), q(i)) = (1 − α)Pt1−α Xt − wcf . w π(a, q) increasing and concave in a and q Profits Distribution in Open Economy 50 45 40 35 30 productivity 25 20 15 10 5 0 0 5 10 15 20 25 30 35 40 45 50 quality

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