Exporting as a Signal for Product Quality



I develop a dynamic asymmetric information model where a domestic producer is unable to commit to producing a high-quality product. The domestic producer then can signal to consumers that it is producing a high-quality product by developing the infrastructure needed to start exporting the product. This signalling may take place even if selling internationally is less profitable than selling high quality only at home in the absence of credibility problems. Thus, this paper provides another explanation for the decision to start exporting. I then analyse how and which kind of export subsidies alter a firm's incentive to sell a high-quality product in different markets.