Advanced Search
MyIDEAS: Login to save this paper or follow this series

Income distribution and vertical comparative advantage Theory and evidence

Contents:

Author Info

  • Hélène LATZER

    ()
    (BETA, Université de Strasbourg and Université catholique de Louvain, Institut de Recherches Economiques et Sociales)

  • Florian MAYNERIS

    ()
    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))

Abstract

In this paper, we provide a general model discussing the impact of non-homothetic preferences on the vertical comparative advantage of countries, i.e. the existence of demand-based determinants of the quality content of production and exports. We show that while average income positively impacts the quality mix of a country’s exports, the impact of inequality depends on the shape of the curve describing the evolution of the income share devoted to high-quality varieties. Along levels of income where this curve is increasing and convex, inequality increases aggregate demand for high quality varieties, more and more rapidly along income. Our empirical results on the quality content of bilateral export flows within the enlarged EU confirm our theoretical predictions. We show that a country’s income distribution has a significant impact on the quality of its exports. Moreover, the impact of inequality on the quality of exports is all the more positive that the exporter is rich. Our estimations are robust to instrumentation and inclusion of controls for supply-side determinants. In a quantification exercise, we show that the positive effect of inequality can be substantial and is magnified when coupled with an increase in average income. This suggests that a growing middle class is decisive for internal demand to drive quality upgrading of production and exports of a country.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://sites.uclouvain.be/econ/DP/IRES/2012018.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2012018.

as in new window
Length: 44
Date of creation: 29 Aug 2012
Date of revision: 20 Oct 2012
Handle: RePEc:ctl:louvir:2012018

Contact details of provider:
Postal: Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium)
Fax: +32 10473945
Email:
Web page: http://www.uclouvain.be/ires
More information through EDIRC

Related research

Keywords: Product quality; Income distribution; Trade; Economies of scale; Home market effect;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Dongsheng Zhou & Barbara J. Spencer & Ilan Vertinsky, 2000. "Strategic Trade Policy with Endogenous Choice of Quality and Asymmetric Costs," NBER Working Papers 7536, National Bureau of Economic Research, Inc.
  2. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
  3. Angela Cheptea & Lionel Fontagné & Soledad Zignago, 2010. "European Export Performance," Working Papers 2010-12, CEPII research center.
  4. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
  5. Muhammed Dalgin & Devashish Mitra & Vitor Trindade, 2004. "Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach," NBER Working Papers 10800, National Bureau of Economic Research, Inc.
  6. Martin, Julien, 2012. "Markups, quality, and transport costs," European Economic Review, Elsevier, vol. 56(4), pages 777-791.
  7. Gabor Pula & Daniel Santabárbara, 2012. "Is china climbing up the quality ladder?," Banco de Espa�a Working Papers 1209, Banco de Espa�a.
  8. Matilde Bombardini & Giovanni Gallipoli & Germán Pupato, 2009. "Skill Dispersion and Trade Flows," NBER Working Papers 15097, National Bureau of Economic Research, Inc.
  9. Maurice Kugler & Eric Verhoogen, 2008. "The Quality-Complementarity Hypothesis: Theory and Evidence from Colombia," NBER Working Papers 14418, National Bureau of Economic Research, Inc.
  10. Lionel Fontagné & Guillaume Gaulier & Soledad Zignago, 2008. "Specialization across varieties and North-South competition," Economic Policy, CEPR & CES & MSH, vol. 23, pages 51-91, 01.
  11. Paulo Bastos & Joana Silva, . "The Quality of a Firm’s Exports: Where you Export to Matters," Discussion Papers 08/18, University of Nottingham, GEP.
  12. Arnaud Costinot & Jonathan Vogel, 2010. "Matching and Inequality in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 747-786, 08.
  13. Rosario Crinò & Paolo Epifani, 2010. "Productivity, Quality, and Export Intensities," UFAE and IAE Working Papers 824.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  14. Reto Foellmi & Christian Hepenstrick & Josef Zweimüller, 2010. "Non-homothetic preferences, parallel imports and the extensive margin of international trade," IEW - Working Papers 497, Institute for Empirical Research in Economics - University of Zurich.
  15. Gaulier, Guillaume & Zignago, Soledad, 2004. "Notes on BACI (analytical database of international trade). 1989-2002 version," MPRA Paper 32401, University Library of Munich, Germany.
  16. Choi, Yo Chul & Hummels, David & Xiang, Chong, 2009. "Explaining import quality: The role of the income distribution," Journal of International Economics, Elsevier, vol. 77(2), pages 265-275, April.
  17. Amit Khandelwal, 2009. "The Long and Short (of) Quality Ladders," NBER Working Papers 15178, National Bureau of Economic Research, Inc.
  18. Vandenbussche, Hylke & Wauthy, Xavier, 2001. "Inflicting injury through product quality: how European antidumping policy disadvantages European producers," European Journal of Political Economy, Elsevier, vol. 17(1), pages 101-116, March.
  19. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2005. "What You Export Matters," NBER Working Papers 11905, National Bureau of Economic Research, Inc.
  20. Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
  21. repec:bla:restud:v:77:y:2010:i:4:p:1450-1476 is not listed on IDEAS
  22. Julien Martin, 2009. "Spatial Price Discrimination in International Markets," Working Papers 2009-21, CEPII research center.
  23. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  24. GABSZEWICZ, Jean J. & WAUTHY, Xavier Y., 2001. "The option of joint purchase in vertically differentiated markets," CORE Discussion Papers 2001013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  25. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
  26. Davis, Donald R. & Weinstein, David E., 2003. "Market access, economic geography and comparative advantage: an empirical test," Journal of International Economics, Elsevier, vol. 59(1), pages 1-23, January.
  27. Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September.
  28. Pol Antras & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," American Economic Review, American Economic Association, vol. 102(3), pages 412-16, May.
  29. Keith Head & Thierry Mayer, 2011. "Gravity, market potential and economic development," Journal of Economic Geography, Oxford University Press, vol. 11(2), pages 281-294, March.
  30. Eddy Bekkers & Joseph F. Francois & Miriam Manchin, 2012. "Import Prices, Income, and Inequality," wiiw Working Papers 82, The Vienna Institute for International Economic Studies, wiiw.
  31. Juan Carlos Hallak & Peter K. Schott, 2008. "Estimating Cross-Country Differences in Product Quality," NBER Working Papers 13807, National Bureau of Economic Research, Inc.
  32. Klaus Desmet & Stephen L. Parente, 2010. "Bigger Is Better: Market Size, Demand Elasticity, And Innovation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(2), pages 319-333, 05.
  33. Murata, Yasusada, 2008. "Engel's law, Petty's law, and agglomeration," Journal of Development Economics, Elsevier, vol. 87(1), pages 161-177, August.
  34. Amiti, Mary & Khandelwal, Amit, 2009. "Competition and Quality Upgrading," CEPR Discussion Papers 7562, C.E.P.R. Discussion Papers.
  35. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Lisandra Flach & Eckhard Janeba, 2013. "Income Inequality and Export Prices across Countries," CESifo Working Paper Series 4298, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ctl:louvir:2012018. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne DAVISTER-LOGIST).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.