Trade and Prices with Heterogeneous Firms∗

This paper estimates a heterogeneous firms trade model using disaggregate data on export values and prices. Prices contain information about differences in product quality across firms and countries that helps identify key mechanisms in the model. Examining within-country variation in export prices across destination markets, I find that prices behave in a manner inconsistent with the benchmark model that ignores product quality differences across firms. In doing so, I demonstrate that export prices in most sectors are consistent with a model in which high productivity firms choose to produce high quality goods and charge high prices. Using model estimates, I also quantify the role of endogenous non-tradability in accounting for variation in prices and trade flows, and construct an index of cross-country quality and variety within sectors. ∗I am grateful to Pierre-Olivier Gourinchas for many productive discussions regarding this work. I also thank Chang-Tai Hsieh, Chad Jones, Guillermo Noguera, Maurice Obstfeld, Jonathan Rose, and participants in seminars at Boston University, Dartmouth, Federal Reserve Board, Georgetown, Harvard, LSE, Maryland, MIT, Northwestern, Pompeau Fabra (CREI), Rochester, UC Berkeley, World Bank DERG, and the 2008 SED Meetings. My thanks as well to Marc Melitz for providing data on trade costs. †International Economics Section, Princeton University, [email protected].