Product Quality in Food and Agricultural Trade: Firm Heterogeneity and the Impact of Trade Costs

Abstract

We develop a heterogeneous firm model that allows us to identify the relationship between firm productivity and product quality. The model is used to analyze the impact of trade costs on food and agricultural trade based on a bilateral trade dataset covering 159 countries over the period 2010–2013. The results show that a high firm capability cutoff—implying an ability to produce high quality—limits export market entry. In addition, fixed and variable trade costs have a negative and significant impact on the probability of firms entering export markets, while variable trade costs have a negative and significant effect on firms’ export levels.