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Luca Macedoni, Aarhus University Print
Friday, 15 February 2019, 12:15 - 13:15

Luca Macedoni, Aarhus University

Quality Heterogeneity and Misallocation: The Welfare Benefits of Raising your Standards.

Abstract : Domestic regulations on product standards are a key point of contention in modern trade agreements, but frameworks generally ignore their heterogeneous impact across domestic firms. Using data from Chile, we find that more restrictive domestic standards are associated with a reallocation of domestic sales from low- to high-quality firms. Guided by this evidence, we study the welfare effects of quality standards in a model with monopolistically competitive, heterogeneous firms, and a general demand system. Raising the quality standard forces low-quality firms to exit. Welfare improves if low-quality firms over-produce in the market allocation relative to the efficient allocation. A reduction in trade costs reduces the optimal restrictiveness of a standard in a cooperative equilibrium across countries. We calibrate our model across Chilean industries and find that in several instances the imposed standard is too restrictive relative to a theoretical upper bound. There is suggestive evidence that a rise in openness has reduced restrictiveness, which supports the efforts to improve agreements on product standards along with traditional trade policy tools.

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