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Tariff Pass-Through, Firm Heterogeneity and Product Quality

  • Zhi George Yu
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    Previous studies on tariff pass-through were constrained at the industry level. This paper is the first attempt to explore tariff pass-through at the firm level, and to investigate how it depends on firm heterogeneity in productivity and product differentiation in quality. Using an extended version of the Melitz and Ottaviano (2008) model, I show that exporting firms absorb tariff changes by adjusting both their markups and product quality, which leads to an incomplete tariff pass-through. Moreover, tariff absorption elasticity negatively depends on firm productivity for quality differentiated goods, but positively depends on firm productivity for quality homogeneous goods. Using the U.S. transaction level export data and plant-level manufacturing data, I find evidence for these predictions. The firm-level tariff absorption elasticity is 0.87 on average. All products in the sample on average fit the definition of quality differentiated goods, and the tariff absorption elasticity is indeed higher for low productivity firms (1.27) and lower for high productivity firms (0.44). Dividing all products into quality homogeneous goods and quality differentiated goods in terms of various criteria also results in estimates consistent with model predictions for quality differentiated goods.

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    File URL: ftp://ftp2.census.gov/ces/wp/2010/CES-WP-10-37.pdf
    File Function: First version, 2010
    Download Restriction: no

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 10-37.

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    Length: 44 pages
    Date of creation: Oct 2010
    Date of revision:
    Handle: RePEc:cen:wpaper:10-37
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