28 , 2016-01-13 , Institute of Comparative Economic Studies, Hosei University
Either quality sorting or the presence of a speciﬁc cost (the so-called Alchian-Allen eﬀect) is considered to be the main mechanism for the positive relationship between product quality and the distance to market. However, the reduced-form regressions found in the literature generally fail to reveal which of these two mechanisms is (or even whether both are) the main driving force. In this study, we employ unique Japanese individual goods price data to identify separately the eﬀects of quality sorting and speciﬁc costs. Our empirical analysis shows that while high-cost producers produce high-quality goods, as suggested in Baldwin and Harrigan (2011), the quality-sorting mechanism solely is not suﬃciently strong to account for the purported positive link between quality and distance. Moreover, we do ﬁnd that the technology parameter that relates costs to quality is overestimated in the absence of speciﬁc costs. On this basis, we conﬁrm that the presence of speciﬁc costs is signiﬁcant, which may generate the positive relationship between quality and distance. We also ﬁnd that the speciﬁc-cost components in transport costs are more distance elastic than any ad valorem components, a ﬁnding qualitatively consistent with the trade cost speciﬁcation in Hummels and Skiba (2004). Finally, our results are robust with respect to various measures of distance and speciﬁcation.