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Working Paper - Firm Productivity and Product Quality Mismatch: The Role of Processing Trade

Date: 2022-06-06    Source: 


June 2022                                                                                   


Jian Cao, Wei Tian and Miaojie Yu



The conventional wisdom is that high-productivity firms produce (and export) high-quality goods. However, using Chinese firm-level and highly disaggregated product-level transaction trade data from 2000 to 2007, this paper finds that such thinking is invalid, particularly for capital-intensive sectors: high-quality products are produced by low-productivity firms. Rich empirical search reveals that the mismatch between productivity and quality is mainly due to the role of processing trade: the productivity of processing firms is lower than that of ordinary firms, but the export quality is higher. Contingent on trade type, more productive firms export higher quality products. A heterogeneous trade model with novel elements of endogenously-chosen trade type and product quality is developed to explain the empirical findings.

Key Words: product quality; firm productivity; processing trade

JEL: F10, D21, D24

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        Firm Productivity and Product Quality Mismatch -The Role of Processing Trade.pdf