Quality sorting and trade: Firm-level evidence for French wine

Matthieu Crozet (1) , Keith Head (2) , Thierry Mayer (3)

1 CES - Centre d'économie de la Sorbonne
2 Sauder - Sauder School of Business [British Columbia]
3 ECON - Département d'économie (Sciences Po)

Investigations of the effect of quality differences on heterogeneous performance in exporting have been limited by lack of direct measures of quality. We examine exports of French wine, matching the exporting firms to producer ratings from two wine guides. We show that high quality producers export to more markets, charge higher prices, and sell more in each market. More attractive markets are served by exporters that, on average, make lower rated Champagne. Market attractiveness has a weakly negative effect on prices and a strongly positive effect on quantities, confirming the sign predictions of a simple quality sorting model. Methodologically, we make several contributions to the literature. First, we propose an estimation method for regressions of firm-level exports on ability measures and use Monte Carlo simulations to show that it corrects a severe selection bias present in OLS estimates. Second, we show how the means of quality, price, and quantity for exporters to a given market can be used to recover estimates of core parameters (which we compare with firm-level estimates) and discriminate between productivity and quality-sorting versions of the Melitz model. Our new method regresses country means on an index of each country's attractiveness and the fixed costs of entering it. We compare our method, which utilizes explanatory variables estimated in the firm-level regressions, to the conventional approach that relies on a reduced-form relationship with proxies for attractiveness and fixed costs.

Mots clés: gravity; heterogeneity

Domaines: Economies et finances

Matthieu Crozet, Keith Head, Thierry Mayer. Quality sorting and trade: Firm-level evidence for French wine. 2009. ⟨hal-00973018⟩