Exchange Rate Shocks and Quality Adjustments
60 Pages Posted: 21 Oct 2016 Last revised: 27 Feb 2019
Date Written: February 24, 2019
Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that varies its offerings twice-yearly, we document that ruble devaluations are associated with a reduction in the observed material quality of products imported for resale, but that higher quality goods are also more profitable. We reconcile these facts using a simple multi-product sourcing model that features a demand system with expenditure switching, where more profitable products can be dropped more quickly after a cost shock. The estimated model shows that quality downgrading reduces average pass-through by 6% and has meaningful consequences for welfare.
Keywords: Quality Downgrading, Exchange Rate Pass-through, Devaluations, Crisis, Demand Estimation
JEL Classification: D92, E30, F14, F31, L11, L15, L16, L81, M11
Suggested Citation: Suggested Citation