Empirically, the relative importance of these different mechanisms remains an open question. Plant-level datasets typically do not provide information on the destination of exports, which makes it difficult to distinguish among the various channels. Newly available customs datasets on firms’ international transactions have provided some support for the income-based qualitychoice mechanism. In Portuguese data, Bastos and Silva (2008, 2010) show that individual firms charge higher “free on board” (f.o.b.) prices for goods sold to richer destination markets within narrow product categories, controlling for distance and other destination characteristics.<sup>4</sup> The within-firm-product correlation between export prices and destination-country income appears to be quite robust across countries: subsequent papers have documented a similar pattern in data from China, France and Hungary (Manova and Zhang, 2012; Martin, 2012; G ̈org, Halpern, and Murak ̈ozy, 2010). This cross-sectional evidence is not definitive, however, for two reasons. First, firms may “price to market”: they may charge higher mark-ups in richer countries, even for homogeneous goods (Krugman, 1987; Goldberg and Knetter, 1997; Goldberg and Hellerstein, 2008; Alessandria and Kaboski, 2011; Fitzgerald and Haller, forthcoming; Simonovska, 2013). Second, the cross-sectional evidence does not settle the issue of causality: even if export prices do reflect product quality, shocks at the firm level may affect both which products a firm chooses to sell and where it is able to sell them, leading to a positive correlation between price and destination income even in the absence of a causal effect of exporting on firm behavior.

In this short paper, we use a rich combination of customs and firm-product-level price data from Portugal to further investigate the income-based quality-choice channel. Our empirical approach is motivated by two theoretical ideas. First, as mentioned above, countries are asymmetric in income and in their willingness to pay for product quality and individual firms choose to sell higher-quality varieties in richer markets. Second, firm productivity and input quality are complements in producing output quality and firms use higher-quality inputs to produce higher-quality products, as in Verhoogen (2008) and Kugler and Verhoogen (2012). We develop a Melitz (2003)type model that embeds both ideas (which appears in the appendix to save space); although the basic ingredients are familiar from the literature, we are not aware of a paper that combines them in a general-equilibrium setting. The key theoretical implication is that an exogenous shift in the

> exporting effects are particularly strong when exporting to richer foreign markets, for instance because of stricter standards or more demanding buyers, is very much in the spirit of the income-based quality-choice story described above (see e.g. De Loecker (2007)).

> 4The f.o.b. prices in principle should not include transport costs, which are likely to vary across countries. Bastos and Silva (2008, 2010) also find a positive correlation between price and distance, consistent with the “Washington apples” hypothesis.

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