Working Paper: NBER ID: w15329
Authors: Pablo D. Fajgelbaum; Gene M. Grossman; Elhanan Helpman
Abstract: We develop a framework for studying trade in vertically and horizontally differentiated products. In our model, consumers with heterogeneous incomes and tastes purchase a homogeneous good as well as making a discrete choice of quality and variety of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher-quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade―which is driven primarily by demand factors―derives from "home market effects" in the presence of transport costs. The model helps to explain why richer countries export higher-quality goods. It provides a tractable tool for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.
Keywords: Income Distribution; Product Quality; International Trade
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income distribution (D31) | demand for higher-quality products (L15) |
| higher income (D31) | demand for higher-quality products (L15) |
| richer countries (O57) | export higher-quality goods (F10) |
| poorer countries (F63) | import lower-quality goods (L15) |
| trade liberalization (F13) | benefit poorer households in wealthy countries (H53) |
| trade liberalization (F13) | benefit wealthier households in poorer countries (F35) |
| income distribution (D31) | trade patterns (F10) |
| consumer choices (D10) | market outcomes (P42) |