Quality, distance and trade: A strategic approach

This paper contributes to the literature on distance and quality by identifying a firm-based force contributing to explain the observed increase of the quality of shipped goods with the distance of their destination market. This force originates from the influence of distance on firms’ strategic behaviour in the presence of consumer heterogeneity, when the quality level of goods is a choice variable for them. Our approach differs from the extant literature because it does not rely on technology or preference/income differentials to identify the determinants and drivers of trade flows. We find that distance has an unambiguously positive effect on the average quality of traded goods. Our results contribute to the analysis of the determinants of firms’ trade performance.