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Income distribution, product quality, and international trade

Listed author(s):
  • Fajgelbaum, Pablo
  • Grossman, Gene M.
  • Helpman, Elhanan

The authors develop a framework for studying trade in horizontally and vertically differentiated products. In their 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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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5843.

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Date of creation: 01 Oct 2011
Handle: RePEc:wbk:wbrwps:5843
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  4. Vitor Trindade & Muhammed Dalgin & Devashish Mitra, 2006. "Inequality, Nonhomothetic Preferences, And Trade: A Gravity Approach," Working Papers 0606, Department of Economics, University of Missouri, revised 08 May 2006.
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  9. 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.
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  40. Devashish Mitra & Vitor Trindade, 2003. "Inequality and Trade," NBER Working Papers 10087, National Bureau of Economic Research, Inc.
  41. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
  42. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  43. Raphael Anton Auer, 2010. "Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?," Working Papers 2010-13, Swiss National Bank.
  44. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
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