NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Income Distribution, Product Quality, and International Trade

Pablo D. Fajgelbaum, Gene M. Grossman, Elhanan Helpman

NBER Working Paper No. 15329
Issued in September 2009
NBER Program(s):   ITI

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.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w15329

Published: Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721 - 765.

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