“A Signaling Model of Quality and Export:with Application to Dumping” by Simon FAN
University of Hong Kong
As highlighted by Akerlof (1970), asymmetric information in the quality of goods between producers and consumers is widely observed in developing countries. This paper attempts to complement the existing literature in two aspects. First, drawing from the literature on quality and trade and supported by the empirical evidence obtained from China, we demonstrate that in a developing country, a firm’s decision to export to developed countries has a potential signaling effect on domestic consumers’ perception of its product quality. Thus, it implies that for developing countries, international trade not only can bring them the familiar benefits from enhanced specialization and international technological spillovers, but also may reduce quality variation and hence raise people’s welfare. Next, the analysis yields a new model of dumping. Because consumers’ preference for low-quality goods is much weaker in developed countries than developing countries, a firm that produces low-quality goods is likely to charge a price in the foreign market of the developed countries lower than its domestic price. This result implies that informational asymmetry between producers and consumers in a developing country is a possible source of dumping. Meanwhile, it suggests that firms in developing countries have a further incentive to dump in foreign markets than firms in developed countries. Further, an analysis of the implications of antidumping policies shows that under some parameter configurations, the implementation of antidumping measures by the foreign country can lead to a Pareto improvement for the firms and consumers of the home country.