REMOVE the Render Layer node, as otherwise Blender will try to render the scene, which is not needed and will waste your time.
There is no need for a File Output node AND a Composite at the same time, they will both output a file in such setup.
The composite node will output a file according to your scene's output settings in the Properties Editor → Output tab.
Whereas the file output node acts basically as its own independent output in addition to the composite.
Thing is, the compositing is done with the scene's output settings (specifically the resolution), so will have to adjust your scene's output no matter what. In other words: if you don't need an extra file output, just use the Composite node, as all the compositing is done with the scene's output settings anyway.
For the quality drop:
Don't fully trust the preview you get in the compositor: these are quick and dirty previews.
The only thing you should look at for quality is your actual output file.
Now there are a few things that you need to set up beforehand:
- start/end frames
- resolution
- frame rate
You can get those info from your file browser, but you can also open your file in the movie clip editor to see the info you need:
Then in the encoding panel, set it to FFMPEG Video. FFMPEG is an encoding software and it offers quite a lot of possibilities.
For your case, since you want AVI, you can set the container to AVI, but you will still need to chose codecs for both the video and audio streams.
You can go two ways here: if you need to further edit this footage later, you may want a high quality encoding at the cost of encoding time and bigger file size. Or in the contrary this is your final result you want to ship on the internet or a client, then you want an encoding that will lose quality but will remain decent while having a lighter file size.
Now, for a good production quality encoding, usually i would like to use DNxHD, but that's bugged at the moment so we will need to use something else in the meantime.
But for reference, here's the parameters for a 1920x1080px 30fps DNxHD:
Note: DNxHD requires to use specific profiles in order to work, particularly bitrates. Here's a reference list.
But we can replace it with HuffYUV at the moment:
Using PCM as audio output.
Now, for a shipping video file, the gold standard right now is h264 contained in MP4, but it works with the AVI container too :
Note that this one uses abstract "output quality" settings. You can easily change them to whatever you want or set it to "constant bitrate" to manually choose the bitrates yourself.
In any case: I highly recommend you to first try woring on a little 1 second long portion with different parameters, and see what works for you. Each video is different, what works for one can be horrible for another one.
With Blender's limited controls, what you should spend time playing with are bit rates. The bigger it is, the more quality you get but also bigger files.