Income Distribution, Product Quality, and International Trade
Pablo D. Fajgelbaum
University of California, Los Angeles (UCLA)
Gene M. Grossman
Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
October 1, 2011
World Bank Policy Research Working Paper No. 5843
The authors develop a framework for studying trade in horizontally and vertically differentiated products. In their model, consumers with heterogeneous incomes and tastes purchase a homogeneous good and make a discrete choice of quality and variety of a differentiated product. The distribution of preferences generates a nested-logit demand structure such that the fraction of consumers who buy a higher-quality product rises with income. The model features a home-market effect that helps to explain why richer countries export higher-quality goods. It provides a tractable tool for studying the welfare consequences of trade and trade policy for different income groups in an economy.
Number of Pages in PDF File: 43
Keywords: Economic Theory & Research, Transport Economics Policy & Planning, Markets and Market Access, Transport and Trade Logistics, Common Carriers Industryworking papers series
Date posted: October 14, 2011
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