Working Paper: CEPR ID: DP15248
Authors: Daniel Goetz; Alexander Rodnyansky
Abstract: Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that refreshes its product line twice-yearly, we document that higher quality products are more profitable than lower quality ones, but that the number of high quality products offered experiences a relative decrease after a large ruble devaluation in 2014. We show that rising firm costs—and not shrinking consumer incomes—explains the reallocation, and rationalize the data with a simple model that features consumer expenditure switching between high and low qualities. The reallocation to lower quality products reduces average pass-through by 15%.
Keywords: Quality; Exchange Rate; Passthrough; Devaluations; Crisis; Demand Estimation
JEL Codes: E30; F14; F31; L11; L15; L16; L81; M11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nominal exchange rate shock (F31) | Reduction in high-quality share for imported goods (F14) |
| Nominal exchange rate shock (F31) | Reduction in high-quality share for domestically produced goods (F14) |
| 1% depreciation in ruble (F31) | 0.32 percentage point reduction in fraction of natural materials in imported goods (F14) |
| Reduction in high-quality share (L15) | Reduction in average passthrough (H29) |
| Rising firm costs (L11) | Quality downgrading (L15) |