Productivity, Quality and Export Behavior

We find a robust negative correlation between Italian firms’ productivity and their export share to low-income destinations. To account for this surprising fact, we marry Verhoogen (2008) with Eaton et al. (2011), by introducing firm heterogeneity in product quality and country heterogeneity in quality consumption in a framework featuring firm and market-specific shocks in entry costs and demand, and estimate the model's parameters structurally by the simulated method of moments. The estimated preference for quality turns out to be monotonically increasing in foreign destinations’ income. The model also predicts a negative correlation between firms’ R&D intensity and their export share to low-income destinations, a finding supported by our data. Overall, our results strongly suggest high-quality firms should concentrate their sales in high-income markets.