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In this paper the heterogeneous firms and trade literature is extended by integrating quality of inputs and outputs in a food and agricultural setting, along with an analysis of how the ability to translate capability into higher product quality is critical in evaluating the cut-offs for food processing firms to enter domestic and export markets. Specifically, it is found that the direction of change in the domestic market cut-off, due to an increased ability to raise quality, is sensitive to key parameters of the capability distribution; while for the export market cut-off the direction of change depends on the fixed costs of entry into and rents from exporting. These hypotheses are then tested for using panel data for Chilean food processors.


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