Quality heterogeneity and global economic growth |
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Authors: | Elias Dinopoulos Bulent Unel |
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Affiliation: | aDepartment of Economics, University of Florida, Gainesville, FL 32611, United States;bDepartment of Economics, Louisiana State University, 2134 Patrick F. Taylor Hall, Baton Rouge, LA 70803, United States |
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Abstract: | This paper develops a fully endogenous, variety-expansion growth model with firm-specific quality heterogeneity, limit pricing, and an endogenous distribution of markups. Firms with high-quality products engage in exporting, firms with intermediate-quality products serve the domestic market, and inefficient firms with low-quality products exit the market. Trade liberalization, measured by a reduction in trade costs or a decline in foreign market entry costs, generates a reallocation of resources from low-quality to high-quality products and exit of inefficient firms. However, it has ambiguous effects on the average global quality level, long-run growth, and welfare. An increase in the rate of population growth or in the intensity of trade-related knowledge spillovers accelerates economic growth. The laissez-faire equilibrium is inefficient, and this leaves room for welfare-improving government intervention. |
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Keywords: | International trade Economic growth Firm heterogeneity Product quality R& D Trade costs Trade liberalization |
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