I develop a dynamic asymmetric information model where a domestic producer
is unable to commit to producing a high-quality product. The domestic produ
cer then can signal to consumers that it is producing a high-quality produc
t by developing the infrastructure needed to start exporting the product. T
his signalling may take place even if selling internationally is less profi
table than selling high quality only at home in the absence of credibility
problems. Thus, this paper provides another explanation for the decision to
start exporting. I then analyse how and which kind of export subsidies alt
er a firm's incentive to sell a high-quality product in different markets.