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Income Distribution, Product Quality and International Trade

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  • Pablo D. Fajgelbaum

    (Princeton)

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    Abstract

    We develop a framework for studying trade in vertically and horizontally and differentiated products. In our model, consumers have heterogeneous incomes and heterogeneous tastes. They purchase a homogeneous good as well as making a discrete choice of quality and variety of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher- quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade which is driven primarily by demand factors derives from Âhome market e¤ects in the presence of transport costs. When these costs are sufficiently small, goods of a given quality are produced in a single country. The model provides a tractable tool for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 415.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:415

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Cited by:
    1. Julia Cagé & Dorothée Rouzet, 2013. "Improving "National Brands": Reputation for Quality and Export Promotion Strategies," PSE Working Papers halshs-00797006, HAL.
    2. Raphael Anton Auer & Thomas Chaney & Philip Ulrich Sauré, 2012. "Quality Pricing-to-Market," Working Papers 2012-11, Swiss National Bank.
    3. Hélène LATZER, 2013. "Beyond the Arrow effect: income distribution and multi-quality firms in a Schumpeterian framework," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    4. Christian Hepenstrick, 2010. "Per-capita incomes and the extensive margin of bilateral trade," IEW - Working Papers 519, Institute for Empirical Research in Economics - University of Zurich.
    5. Francesco Di Comite, 2012. "Measuring quality and non-cost competitiveness at a country-product level," European Economy - Economic Papers 467, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    6. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.

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