How Geography Affects Quality∗

This paper investigates how a country’s geographic position relative to other countries affects the quality of its exports. The two driving forces are the supply-side response to the specific transportation cost (generalized Alchian-Allen effect) and the stronger preference for quality in richer countries. Producers who may be unable to adjust quality for every market will choose a common quality level that is a function of their destinations’ trade-weighted average preference for quality and specific transportation cost. The data confirm the theoretical prediction. Exporters of differentiated goods that face a stronger demand for quality from richer countries charge 5–9% more for all destinations. At the same time, countries whose demand is especially distorted by the Alchian-Allen effect charge 14–24% more. Moreover, geography is more significant to the quality choice of developing countries. Multilateral geographic factors explain 7.6% of the price variation for the non-OECD exporters, and only 4.2% for the OECD exporters. The Alchian-Allen effect influences an exporter’s quality roughly two to three times as much as the proximity to rich importers does. ∗We thank James Anderson, Jeffrey Bergstrand, David Hummels, Travis Ng, Klaas T. van’t Veld, the seminar audiences at the U Alabama, U Illinois, and the participants of 2010 Conference on Trade Costs and International Trade Integration in Venice, 2010 SAET Conference in Singapore, and 2010 AIT Conference at GA Tech. David Hummels graciously provided us access to the BTI trade database. †School of Economics, Georgia Institute of Technology, Atlanta, GA 30332-0615; e-mail: [email protected] ‡Corresponding author. Department of Economics and Finance, University of Wyoming, Dept 3985, 1000 E University Ave, Laramie, WY 82071, e-mail: [email protected]