A Product-Quality View of the Linder Hypothesis

The Linder hypothesis has attracted substantial empirical research over decades. However, the evidence has failed to provide consistent support for it. This paper explains the failure. Building a theoretical framework in which, as in Linder's theory, product quality plays the central role, I show that the Linder hypothesis is formally derived but holds only when formulated as a sector-level prediction. This prediction is then estimated using a sample of 64 countries in 1995. The results support the sectoral Linder hypothesis: controlling for the effect of intersectoral determinants of trade, countries of similar income per capita trade more intensely with one another.