Heterogeneous Firms, Quality, and Trade

The model generates a unified theory and a supply-side explanation for an extremely rich set of stylized facts relating to (i) productivity heterogeneity, (ii) product quality heterogeneity, (iii) markups heterogeneity, (iv) heterogeneity in the response of firms to competition, and (v) heterogeneity in the sign and magnitude of the correlations between output prices, firm productivity, size, and product quality. In addition, the model predicts that average price and markups exhibit a U-shape response to competition and that imports from developed countries have higher quality, markups and prices when compared to imports from developing countries.