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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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