Quality and gravity in international trade

This paper introduces endogenous quality innovations in a multi-country model with heterogeneous firms. We show that investments lead to an additional margin of adjustment the gravity equation. In industries high scope for differentiation, elasticity bilateral exports respect fixed costs is lower due adjustments at extensive margin, whereas variable remains unaffected. find robust and consistent evidence effect differentiation on equation, using aggregate trade data Brazilian firm-level data. apply our evaluate impact policies reduce export costs. Our results highlight welfare effects are substantially become much more dispersed across than predicted by firm models without differentiation.