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Price, quality and trade costs in the food sector
Full text linkRecent developments in international trade theory have placed considerable and growing emphasis on the quality of the exported products, showing that it affects both the direction of trade and the countries' export performances. However, as quality is unobservable, a measurement problem clearly emerges. In this paper we review and apply some of the most recent methods developed in the international trade literature to estimate quality of traded products. We focus on the food sector, where the growing attention on quality and safety issues is leading to an increase in the demand for high quality products. In the first part of our empirical analysis, we investigate the properties of the estimated qualities, drawing some interesting results. In particular we find that, in contrast with what is often assumed in the literature, quality and prices are imperfectly correlated. The second empirical section is dedicated to the study of the relationship between price vs. quality and trade costs. What emerges is that, interestingly, the price and the quality of food exports are influenced differently by ad valorem and specific trade costs. Moreover, the magnitude of this relationship changes according to the level of product differentiation
QUALITY, TRADE AND MARKET COMPETITION: EVIDENCE FROM THE FOOD INDUSTRY
No full textIn the last decades globalization and the increasing international interdependence are characterizing the world economy. The global crisis of 2008 and 2009, where the volume of world trade declined by more than one-quarter, represents a clear example of how the economic fortunes of countries are strictly intertwined. Hence, it is of primary importance understanding what drives foreign trade and how trade affects the economic outcomes (Helpman, 2011).
In the last years, a large body of literature seems to agree that the quality of exported products can be considered one of the key determinants of the international trade flows. A large body of evidence emphasizes that products quality affects the direction of trade, since richer countries tend to import more from countries producing higher-quality goods (Linder, 1961; Hallak, 2010; Crinò and Epifani, 2012). Moreover, the increase in market competition due to globalization leads the production of higher quality goods to be considered more often a pre-condition for export success (Helpman, 2011; Amiti and Khandekwal, forthcoming).. However, the quantification of the role of quality in explaining trade outcomes is often prevent by the lack of direct measures of quality, forcing researchers to use proxies, to make quality measurable (Schott, 2004; Hallak, 2006; Hummels and Klenow, 2005). The most common proxy on which researchers rely to measure the quality of the exported goods is unit values, according to which higher unit values reflect higher-quality products. However, there are several evidences in literature showing that unit values are imprecise measure of quality, because unit values also capture several aspects that are not attributable to quality. In this context, we analyze the extent to which product quality affects the international trade patterns exploring different issues.
In the first chapter, we present a review of the literature on the role of quality in determining the trade patterns. We focus in particular on the quality sorting models, that represent an extension of the seminal “firm heterogeneity” model proposed by Melitz (2003). In the last section of the chapter, we present the Crinò and Epifani (2012) model, on which it is built the empirical exercise proposed in the second chapter. Such a model extends the heterogeneous-firm’s model a la Melitz (2003) by incorporating firms heterogeneity in product quality and non-homothetic preferences.
In the second chapter, we empirically investigate the relationship between product quality and food export performance using an alternative approach to infer product quality. Specifically, it is made use of a (unbalanced) panel of roughly 750 Italian food firms, observed in the period 2001-2006. The main advantage of this dataset is that it allows the construction of a large set of firm-level variables, strictly correlated with product quality, like investment intensity, R&D expenditure, product and process innovations, as well as quality standard certifications. Using this data it has been studied the relationship between Total Factor Productivity (TFP), product quality and firms export across destinations, relying on the theoretical model developed by Crinò and Epifani (2012). Moreover, it is studied the relationship for both the overall food industry and the ‘sub-samples’ related to firms producing typical ‘Made in Italy’ and ‘Protected Designation of Origin’ (PDO) products, in order to investigate if the perceived quality of these two product aggregations really matters for firms export behavior. We found strong support for the key model prediction, namely product quality matters for export performance. Specifically, this work reveals robust evidence that the correlation between export intensity and TFP/quality increases with the per-capita income of foreign destinations. Thus, more efficient firms have higher export performance as they use more expensive and quality inputs to sell higher-quality goods at higher prices.
In the third chapter, we deal with the quality measurement issue. After a review over the most common approaches used in the economic literature, we present an innovative method proposed by Khandelwal (2010) to infer product quality using price and quantity information from trade data. This methodology, based on the nested logit framework of Berry (1994), has this straightforward intuition: “conditional on price, imports with higher market shares are assigned higher quality”. Relying on such method, we make use of trade data from the Eurostat-Comext database, to infer the quality of the imported agri-food products in the EU 15 countries at the country-product (CN 8-digit) level. We show that, even using different destination countries and focusing on a specific (food) industry, our quality estimate results match the ones of Khandelwal (2010). Moreover, through different exercises and examples, we showed that our quality estimations can be considered reasonable realistic and, thus, particularly useful in assessing the role of product quality in influencing the trade patterns.
In chapter 4, the product quality estimates will be used to analyze to what extent an increase in the level of competition (expressed by a reduction in import tariffs) in the origin country, affects the quality of the exported food products in the EU15. More specifically, using the country-product measure of quality, estimated in Chapter 3, we rely on the approach proposed by Amiti and Khandelwal (forthcoming), by studying the relationship between quality upgrading and competition within a model of ‘distance to the frontier’ of Aghion et al. (2005; 2009). These authors argued that the relationship between competition and innovation is non-monotonic and conditional to the firm/product distance from the (world) technology frontier. Moreover, we extend this approach studying the extent to which the level of voluntary standards in the EU 15 affects the competitive environment in the exporting market, namely, if standards act as a catalyst (thus increasing the level of competition) or as a barrier to trade.
Main results show that trade liberalization in exporting countries boosts the rate of quality upgrading for varieties close to the quality frontier. These results hold true for both OECD and non-OECD countries, by using alternative measures of the world quality frontier and of the quality upgrading. Moreover, we find, on average, a positive effect of EU standards on the rate of quality upgrading of the exported products, a results that is only marginally affected by the products distance from the world quality frontier
Export Behaviour of Italian Food Firms Across Destinations : Does Product Quality Matter?
No full textUsing firm-level data we investigate the export behaviour of Italian food firms during 2001-2006, focusing on the link between total factor productivity (TFP), products quality, and export across destinations. Specifically, we test the main propositions of an international trade model based on firm heterogeneity in product quality and non-homothetic preferences. Under this setting, the export intensity toward low income destinations should be negative related to TFP, as an effect of firm heterogeneity in products quality. Using different measures of revenue-TFP and several proxies for product quality we find support for the main model predictions, showing also that the elasticity of export intensity across destinations is systematically higher (in absolute value) for a sub-sample of Italian firms producing typical ‘Made in Italy’ products
Export behaviour of Italian food firms : Does product quality matter ?
Full text linkUsing firm-level data we investigate the export behaviour of Italian food firms, focusing on the link between total factor productivity (TFP), product quality, and export across heterogeneous destinations. We test the main predictions of an international trade model based on firm heterogeneity in product quality and non-homothetic preferences in consumption. In this setting, the firm’s export intensity should be increasing in the per-capita income of foreign destinations, and the effect should be largely driven by firms’ heterogeneity in product quality. Using different measures of revenue-TFP, and different proxies for product quality, we find strong support for the main model predictions. Moreover, consistent with the Alchian-Allen effect, we find a positive relationship between the quality of exported products and the distance of destination countries
Trade collapse, quality and food exports
Full text linkThis article revisits the so-called ‘Collapse in Quality’ hypothesis, according to which, during the 2008–2009 crisis, higher quality goods experienced a stronger export reduction compared to low-quality ones. Using disaggregated trade data from three European countries that traditionally export high-quality food products – France, Italy and Spain – we do not find any econometric evidence supporting this hypothesis. In contrast, we provide preliminary evidence for the concurrent hypothesis, namely that firms reduced their markup to preserve market shar
Effect of democratic reforms on child mortality: a synthetic control analysis
Full text linkSummaryBackgroundThe effects of political regimes on health are unclear because empirical evidence is neither strong nor robust. Traditional econometric tools do not allow the direction of causality to be established clearly. We used a new method to investigate whether political transition into democracy affected child mortality.MethodsWe used a synthetic control method to assess the effects of democratisation on child mortality as a proxy of health in countries that underwent transition from autocracy to democracy that lasted for at least 10 years between 1960 and 2010. Democracy was indicated by a score greater than 0 in the Polity2 index. We constructed synthetic controls (counterfactuals) based on weighted averages for factors such as child mortality, economic development, openess to trade, conflict, rural population, and female education from a pool of countries that remained autocracies during the study period.ResultsOf 60 countries that underwent democratic transition in the study period, 33 met our inclusion criteria. We were able to construct good counterfactuals for 24 of these. On average, democratisation reduced child mortality, and the effect increased over time. Significant reductions in child mortality were seen in nine (38%) countries, with the average reduction 10 years after democratisation being 13%. In the other 15 countries the effects were not significant. At the country level yhe effects were heterogeneous, but the differences did not correlate with geographic, economic, or political indicators. The effect of democratisation, however, was stronger in countries with above average child mortality before transition than in countries with below average child mortality.InterpretationOur results are consistent with the interpretation that democratic reforms have the greatest effects when child mortality is a direct concern for a large part of the population. Future research could focus on identifying the precise mechanism through which the effects emerge.FundingEuropean Union 7th Framework Programme and KU Leuven Methusalem Fund
Democratic reforms and health: interpreting causal estimates – Authors' reply
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HOME BIAS IN CONSUMPTION : A COMPARISON BETWEEN WINE AND BEER
No full textThis paper investigates the determinants of home bias in consumption in the beer
and wine markets across the EU 15 ‘old’ member states, over the period 2000-2009.
Using a theory-driven gravity model we reach two main results. First, the home bias
in beer consumption is by several orders of magnitude higher than that of wine.
Second, and interesting, in the wine sector the home bias seems to be largely driven
by the role of preferences. Differently, the home bias in beer is widely attributable to
the home market effect, due to firms’ localization choices
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