Domestic Industrial Structure and Export Quality

Country of origin may provide a signal of product quality. If consumers are on average "correct" in thei r assessments of product quality from a given country, then a "lemons " effect emerges. A firm which pays the full cost of quality improvem ent will receive only diluted benefits in return, while competitors gain by free-riding. The resulting international trade equilibrium i s suboptimal for the exporting country. The country may be able to ra ise its welfare by use of export quality standards, or by internalizi ng the externality by limiting export licenses or by industrial conso lidation.