No. 2020003                                                                    

August 2020

Xiaomin Cui, Miaojie Yu, Rui Zhang and Aarhus University

Abstract

Better contracting environment and judicial quality in a country not only constitute a comparative advantage in industries intensively using customized input, but also induce quality upgrading of domestic varieties and tougher domestic competition, affecting the quality compositions of trade in those industries. To characterize these effects, we develop a Ricardian model that accounts for relationship-specificity of customized input and product quality choice. Using legal origin as the instrument for judicial quality, we empirically confirm the model’s implications of country-level judicial quality for trade pattern, price, and quality across industries and products. We then propose new welfare formulas highlighting the domestic competition and quality composition effects and show that domestic shocks are critical in driving relative welfare changes across countries. 

Keywords: Judicial quality, Contracts, Customized input, Quality, Trade margins

Read the full-text PDF here:

      Judicial Quality, Input Customization, and Trade Margins The Role of Product Quality.pdf

[Note] 

This article was published in December 2021 in The Economic Journal,

Volume 132, Issue 643, 

Pages 926–952, 

https://doi.org/10.1093/ej/ueab098