Quality and gravity in international trade

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This paper introduces endogenous quality innovations in a multi-country model with heterogeneous firms. We show that quality investments lead to an additional margin of adjustment in the gravity equation. In industries with a high scope for quality differentiation, the elasticity of bilateral exports with respect to fixed costs is lower due to adjustments at the extensive margin, whereas the elasticity with respect to variable costs remains unaffected. We find robust and consistent evidence for the effect of quality differentiation 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 trade and welfare effects are substantially lower and become much more dispersed across industries than predicted by heterogeneous firm models without quality differentiation.

Original languageEnglish
Article number103578
JournalJournal of International Economics
Number of pages25
Publication statusPublished - 07.2022
Externally publishedYes

Bibliographical note

Financial support from the Deutsche Forschungsgemeinschaft through SFB/TR15 is gratefully acknowledged.☆ We are grateful to Pol Antràs, Michele Battisti, Daniel Baumgarten, Kirill Borusyak, Holger Breinlich, Maggie Chen, Banu Demir, Swati Dhingra, Carsten Eckel, Peter Egger, Julian di Giovanni, Oleg Itskhoki, Ina Jäkel, Sebastian Krautheim, Mario Larch, Kalina Manova, Giordano Mion, Eduardo Morales, Dennis Novy, Ralph Ossa, Gianmarco Ottaviano, Georg Schaur, Tim Schmidt-Eisenlohr, Monika Schnitzer, Alexander Skiba, Joel Stiebale, Olga Timoshenko, Fabian Waldinger, Martin Watzinger, as well as participants of CEPR European Research Workshop in International Trade (ERWIT) 2018 in St Gallen, CAS International Workshop in Munich, Midwest Meetings at Purdue University 2016, Warsaw International Economic Meeting 2016, CESifo Area Conference on Global Economy 2016 in Munich, 18th Workshop “Internationale Wirtschaftsbeziehungen” in Göttingen, and seminar participants at George Washington University, Aarhus University, LMU Munich, Goethe University Frankfurt, University of Göttingen, University of Mannheim, CAS München, University of Vienna and FIW “International Economics” Workshop for helpful comments and suggestions. Financial support from the Deutsche Forschungsgemeinschaft through SFB/TR15 is gratefully acknowledged.

Publisher Copyright:
© 2022 Elsevier B.V.

    Research areas

  • Gravity equation, Heterogeneous firms, International trade, Product quality, Trade costs
  • Economics