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Abstract
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.