Tariffs, product quality, and the relative prices of durables: Evidence from 1989 to 2009 U.S. microdata

The relative price paid for the same type of goods by rich and poor households is an important determinant of the real income inequality. We document that, in the U.S., the relative prices of durable goods varied substantially between 1989 and 2009, and we explore the role of import tariffs in causing this variation. Theoretically, we construct a model with non-homothetic preferences, income distribution, and trade, in which developed countries have a comparative advantage in the higher-quality varieties due to the lower marginal cost of quality upgrading. In equilibrium, tariff cuts on durables from developed countries will decrease their prices, but will increase the relative price paid by rich households, since a higher share of households will buy varieties produced with the developed-countries’ technology. Tariff cuts on the durables from developing countries, on the other hand, will decrease the relative price. We confirm these predictions empirically using trade and household-level consumption data. Importantly, variation in tariffs explains, on average, 30% of the systematic variation in the relative prices of durables between 1989 and 2009. The obtained estimates indicate that changes in the U.S. tariffs have decreased the cost-of-living for the rich households relative to that of the poor. The extent of this reduction depends on the parametrization of the model.