Income Distribution, Product Quality, and International Trade

By Pablo D. Fajgelbaum, Gene M. Grossman, E. Helpman. Journal of Political Economy, 2011

478 citations recorded by the source corpus.

We develop a framework for studying trade in horizontally and vertically differentiated products. In our 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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/80a32a35023b8bba268352cc1cef28d8d193d649

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Citations in the corpus

Nonhomotheticity and Bilateral Trade: Evidence and a Quantitative Explanation (2011, background): “Furthermore, the error terms in equations (12) and (14) are heteroskedastic and clustered by importer and exporter, making bootstrapping infeasible (without ad hoc structural assumptions on the distribution of error terms).”
Income Growth and the Distributional Effects of Urban Spatial Sorting (2019, background): “Fajgelbaum et al. (2011) for a detailed discussion of the properties of the resulting demand system.”
Monopolistic Competition when Income Matters (2017, unknown): “Finally, Fajgelbaum et al. (2011) consider products of different qualities within a Logit demand system.”
Engel's Law in the Global Economy: Demand‐Induced Patterns of Structural Change, Innovation, and Trade (2019, unknown): “…that rely on some notion of vertical or quality differentiation across goods within a sector, used by Flam and Helpman (1987), Stokey (1991), or Fajgelbaum, Grossman, and Helpman (2011), necessarily imply that goods are gross substitutes, and hence not suited for studying Engel’s Law, i.e.,…”
INTERNATIONAL TRADE PUZZLES: A SOLUTION LINKING PRODUCTION AND PREFERENCES (2014, background): “In line with Linder (1961), the role of quality differentiation has been underscored by Hallak (2006, 2010), Khandelwal (2010), Hallak and Schott (2011), and Fajgelbaum, Grossman, and Helpman (2011), among others.”
The Distributional Consequences of Large Devaluations (2017, background): “Our paper is also related to a large and growing literature in international trade that models demand non-homotheticities and examines the distributional impact of economic integration across consumers (see, e.g. Fajgelbaum et al., 2011; Fajgelbaum and Khandelwal, 2016; Atkin et al., 2016).”
Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities (2013, background): “This form of non-homotheticity is common in the international trade literature where, for example, Fajgelbaum et al. (2011) show the theoretical implications of non-homothetic demand with a model that allows for complementarities between product quality and expenditure on a non-differentiated…”