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Income Distribution, Product Quality, and International Trade

  • Pablo Fajgelbaum
  • Gene M. Grossman
  • Elhanan Helpman

We develop a framework for studying trade in horizontally and vertically differentiated products. In our 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.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 119 (2011)
Issue (Month): 4 ()
Pages: 721 - 765

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Handle: RePEc:ucp:jpolec:doi:10.1086/662628
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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