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Income distribution, product quality, and international trade

Author

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

Abstract

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.

Suggested Citation

  • Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5843
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic Theory&Research; Transport Economics Policy&Planning; Markets and Market Access; Transport and Trade Logistics; Common Carriers Industry;
    All these keywords.

    JEL classification:

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

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