Income distribution, product quality, and international trade

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.

Author: Fajgelbaum,Pablo;Grossman,Gene M.;Helpman,Elhanan.Document Date: 2011/10/01.Document Type:Policy Research Working Paper. Report Number: WPS5843. Volume No: 1 of 1

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