Product quality and firm heterogeneity in international trade

This paper quantifies the separate contributions of product quality and technical efficiency in explaining variation in export outcomes across US manufacturing plants. Unlike previous studies that rely on unit values, I estimate idiosyncratic demand from price and quantity information. I find substantial across-plant heterogeneity in demand, and consistent with the quality interpretation, demand is positively correlated with advertising expenditures, wage rates and material costs. I use this variation to explain across-plant heterogeneity in export outcomes. The results show that, in addition to productivity, idiosyncratic demand is an important determinant of selection into exporting and the levels of foreign sales.