Quality, Distance and Trade: A Strategic Approach

This paper contributes to the literature on distance and quality by identifying a force con- tributing to explain the observed increase of the quality of shipped goods with the distance of their destination market. This force originates from the influence of distance on firms’ strate- gic behavior when the quality level of goods is a choice variable for them, and complements the ones already proposed in the literature. Our approach differs from the extant literature because it does not rely on technology or preference/income differentials to identify the deter- minants and drivers of trade flows. Moreover, it allows to clearly disentangle between the price setting and quality choice of firms. We find that distance has an unambiguously positive effect on the average quality of traded goods. Our results suit the empirical evidence on distance and quality and contribute to the analysis of the determinants of firms’ trade performance.