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How Geography Affects Quality

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Document pages: 42 pages

Abstract: This is the first paper to provide a theoretical model that connects the quality of product-level bilateral trade flows with the geographic position of the exporter. We show that, in addition to commonly used importer characteristics, quality increases (i) in trade-weighted specific transportation cost to the destinations other than the importer and (ii) in trade-weighted preference for quality of destinations other than the importer. The two channels represent extensions of the familiar Alchian-Allen and Linder quality theories to multilateral setting. The model implies that market access to high-income and remote importers can improve quality of exports from low-income countries. The data confirm the theoretical prediction. Exporters of differentiated goods that face a stronger demand for quality from richer countries charge 5-9 more for all destinations. At the same time, countries whose demand is especially distorted by the Alchian-Allen effect charge 14-24 more. Moreover, geography is more significant to the quality choice of developing countries. Multilateral geographic factors explain 7.6 of the price variation for the non-OECD exporters, and only 4.2 for the OECD exporters. The Alchian-Allen effect influences an exporter s quality roughly two to three times as much as the proximity to rich importers does.

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