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A new Method for Quality Estimation using Trade Data: An Application to French firms ⇤

This paper presents a novel instrumental variable strategy that allows to estimate quality at the micro level. Using customs data, we construct a new firm-specific instrument, based on variations in exchange rates interacted with firm-specific importing shares. This instrument is used as a firm-level cost shifter to correct the endogeneity of prices when estimating demand functions. The paper applies this methodology on French customs data for a wide range of goods, and obtain consistent estimates of price-elasticities of demand with a limited number of identifying assumptions.