Improving "National Brands": Reputation for Quality and Export Promotion Strategies

Why do "made in"labels matter? We study 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 depends on both past experience with the good and the country of origin's reputation for quality. Asymmetric information acts as a barrier to entry for high-quality firms but facilitates sales by "fly-by-night"low-quality firms. We derive two types of steady-state equilibria with endogenous reputation. In a high-quality equilibrium, imperfect information does not hinder entry into export markets, but there is a distortion in profits and in the quality composition of exports. In a lowquality equilibrium, we obtain a sorting of firms into exporting that is non-linear in quality. A range of relatively high-quality firms are permanently kept out of the market by the informational friction, so that countries with bad quality reputation can be locked into exporting low-quality, low-cost goods. Export subsidies then have a positive welfare effect on the exporting country, by improving the average quality of its exports and its terms of trade. However, a subsidy has the opposite long-run effects in a country that initially exports relatively high-quality products. The model is consistent with empirical patterns of export prices. Measuring national reputations by analyzing the content of US newspaper articles about foreign countries over 1988-2006, we find that more positive news coverage of foreign countries and companies is associated with higher unit values of their exports to the US, particularly in sectors with a larger scope for vertical differentiation.