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Income Distribution, Product Quality, and International Trade

Author

Listed:
  • Pablo Fajgelbaum
  • Gene M. Grossman
  • Elhanan Helpman

Abstract

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.

Suggested Citation

  • Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
  • Handle: RePEc:ucp:jpolec:doi:10.1086/662628
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    References listed on IDEAS

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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