"Per-capita Income, Taste for Quality, and Exports across Countries" (JMP) [download.pdf]
This paper studies how per-capita income affects trade patterns of quality-differentiated goods across countries. A product's perceived quality depends on intrinsic characteristics of the product as well as consumers' tastes for quality. In addition to aggregate income, this paper features a taste for quality channel through which a destination's income per capita causes the variety-quality tradeoff in product exports. I build a model combining non-homothetic preferences and product quality heterogeneity in which rich consumers demand more high-quality varieties than poor consumers. In equilibrium, holding market size constant, the elasticity of consumer taste for quality with respect to income per capita determines the differences between rich and poor countries in productivity thresholds, firm market shares, and number of varieties produced. To assess the evidence, I construct a quality index and examine cross-country variation in prices and export sales at the firm-product level with Chinese disaggregate trade data from the Household Audio and Video Equipment industry. In line with the model's predictions, the results show that firms charge higher prices in richer countries, and the effects of GDP per capita on export sales differ by product quality. Conditional on entry, low-quality export sales are decreasing in the destination country's GDP per capita, controlling for other country characteristics. The relationship between high-quality export sales and income per capita exhibits an inverted-U shape, which reflects the varying preferences for quality versus variety across consumers at different income levels.
"Effects of Rules of Origin on FTA Utilization Rates and Country Welfare" [download.pdf]
Free trade agreements (FTAs) are generally under-utilized. Assuming full utilization overstates the benefits and overlooks the substantial distortions generated by free trade preferences. This paper investigates the impacts of rules of origin (ROOs) on FTA utilization rates and on country welfare in the context in which there is a vertical production linkage between FTA members. I develop a general equilibrium model featuring both variable and fixed costs of complying with ROOs. A binding ROO forces exporters to employ more locally produced inputs instead of using the most efficient manufacturing process. Additionally, firms face fixed documentation costs due to the administrative process of obtaining certificates of origin. Whether firms utilize an FTA depends on the tariff benefits net of the extra costs. Both local analytical solutions and global numerical results show that: (1) as the ROO becomes stricter, the FTA utilization rate decreases and the dominant extensive margin drives down the wage rate in the downstream country; (2) a slightly binding ROO encourages regional production, and the welfare effects of ROOs are ambiguous depending on the elasticity of substitution between varieties.