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Transport cost and endogenous quality choice
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Lugovskyy, Volodymyr and Skiba, Alexandre (2010) Transport cost and endogenous quality choice. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2010 (Number 17).
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Text (Working paper)
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
This paper examines how the quality of exports depends on relative country size and its
remoteness. Specific transportation cost is the key variable in our analysis as it gives rise to the
Alchian-Allen effect. In the model, we allow for endogenous quality choice by a producer
serving many international locations. Higher quality comes at higher marginal cost of
production, but can be delivered at the same absolute, and thus proportionally lower,
transportation cost to a given destination. Our model complements the well documented demandside
response to the distribution of transportation costs (known as the Alchian-Allen effect) by
the supply side response. We show that, ceteris paribus, equilibrium quality decreases in the
domestic country size and increases in remoteness from foreign markets. This happens because a
larger portion of the demand is affected by the Alchian-Allen effect for smaller countries’
producers, and the Alchian-Allen effect is stronger for remote countries. We confirm our
predictions empirically on a detailed product level dataset of all exporters worldwide into a
sample of Latin American importers.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Alternative Title: | |||||
Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Series Name: | CAGE Online Working Paper Series | ||||
Publisher: | Department of Economics, University of Warwick | ||||
Place of Publication: | Coventry, UK | ||||
Official Date: | June 2010 | ||||
Dates: |
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Volume: | Volume 2010 | ||||
Number: | Number 17 | ||||
Number of Pages: | 21 | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Published | ||||
Date of first compliant deposit: | 1 August 2016 | ||||
Date of first compliant Open Access: | 1 August 2016 |
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