Hylke Vandenbussche

This paper empirically estimates the relative importance of consumer taste in food exports. To explain the export success of firms across a wide range of food products, we separate product quality from product taste and production costs at the firm–product level. To identify the role of consumer taste, we adopt a novel approach. A control function method is used with exogenous instruments for the unobservable variables. Using the taste index for each trade flow, we decompose export revenues to assess the relative importance of taste, quality, and marginal production costs. We find that consumer taste explains on average about 15% of firm–product-level export revenues, product quality about 25%, and production costs about 15%. For food products, consumer taste appears to be just as important a determinant of exports as production costs. This paper therefore highlights the importance of the demand side in trade, which appears to be as important as the productivity side at the highly disaggregated firm–product–country level.