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Improving “National Brands”: Reputation for Quality and Export Promotion Strategies

Author

Listed:
  • Julia Cage

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Dorothée Rouzet

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract
This paper studies the effect of firm and country reputation on exports when buyers cannot observe quality prior to purchase. Firm-level demand is determined by expected quality, which is driven by the dynamics of consumer learning through experience and the country of origin's reputation for quality. We show that asymmetric information can result in multiple steady-state equilibria with endogenous reputation. We identify two types of steady states: a high-quality equilibrium (HQE) and a low-quality equilibrium (LQE). In a LQE, only the lowest-quality and the highest-quality firms are active; a range of relatively high-quality firms are permanently kept out of the market by the informational friction. Countries with bad quality reputation can therefore be locked into exporting low-quality, low-cost goods. Our model delivers novel insights about the dynamic impact of trade policies. First, an export subsidy increases the steady-state average quality of exports and welfare in a LQE, but decreases both quality and welfare in a HQE. Second, there is a tax/subsidy scheme based on the duration of export experience that replicates the perfect information outcome. Third, a minimum quality standard can help an economy initially in a LQE moving to a HQE.

Suggested Citation

  • Julia Cage & Dorothée Rouzet, 2015. "Improving “National Brands”: Reputation for Quality and Export Promotion Strategies," SciencePo Working papers Main hal-01167909, HAL.
    • Handle: RePEc:hal:spmain:hal-01167909
    DOI: 10.1016/j.jinteco.2014.12.013
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01167909
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    References listed on IDEAS

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    Keywords

    product differenciation; export promotion; industrial policy; trade; asymetric information; product quality;
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