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Income distribution, product quality, and international trade

  • 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
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Handle: RePEc:wbk:wbrwps:5843
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  1. Juan Carlos Hallak & Peter K. Schott, 2008. "Estimating Cross-Country Differences in Product Quality," NBER Working Papers 13807, National Bureau of Economic Research, Inc.
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  6. Athey, Susan, 2002. "Monotone Comparative Statics Under Uncertainty," Scholarly Articles 3372263, Harvard University Department of Economics.
  7. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
  8. Mark Bils & Peter J. Klenow, 2000. "Quantifying Quality Growth," NBER Working Papers 7695, National Bureau of Economic Research, Inc.
  9. Verboven, Frank, 1996. "The nested logit model and representative consumer theory," Economics Letters, Elsevier, vol. 50(1), pages 57-63, January.
  10. Muhammed Dalgin & Devashish Mitra & Vitor Trindade, 2004. "Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach," NBER Working Papers 10800, National Bureau of Economic Research, Inc.
  11. Donald R. Davis, 1997. "The Home Market, Trade and Industrial Structure," Harvard Institute of Economic Research Working Papers 1800, Harvard - Institute of Economic Research.
  12. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
  13. Juan Carlos Hallak, 2006. "A Product-Quality View of the Linder Hypothesis," NBER Working Papers 12712, National Bureau of Economic Research, Inc.
  14. 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.
  15. Karl Aiginger & Esteban Rossi-Hansberg, 2006. "Specialization and concentration: a note on theory and evidence," Empirica, Springer, vol. 33(4), pages 255-266, September.
  16. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1450-1476.
  17. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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  19. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," Working Papers 481, Research Seminar in International Economics, University of Michigan.
  20. Juan Carlos Hallak & Jagadeesh Sivadasan, 2010. "Firms' Exporting Behavior under Quality Constraints," Working Papers 99, Universidad de San Andres, Departamento de Economia, revised Mar 2010.
  21. Robert Johnson, 2008. "Trade and Prices with Heterogeneous Firms," 2008 Meeting Papers 244, Society for Economic Dynamics.
  22. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  23. Paolo Epifani & Gino Gancia, 2006. "Increasing Returns, Imperfect Competition, and Factor Prices," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 583-598, November.
  24. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
  25. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
  26. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2.
  27. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 489-530, 05.
  28. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  29. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  30. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
  31. Nancy L. Stokey, 1989. "The Volume and Composition of Trade Between Rich and Poor Countries," Discussion Papers 849, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  32. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
  33. Amiti, Mary, 1998. "Inter-industry trade in manufactures: Does country size matter?," Journal of International Economics, Elsevier, vol. 44(2), pages 231-255, April.
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  38. repec:bla:restud:v:77:y:2010:i:4:p:1450-1476 is not listed on IDEAS
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  40. 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.
  41. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.
  42. Susan Athey, 2002. "Monotone Comparative Statics Under Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 187-223, February.
  43. Aviv Nevo, 2011. "Empirical Models of Consumer Behavior," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 51-75, 09.
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