TY  - JOUR
AU  - Feenstra,Robert C.
AU  - Romalis,John
TI  - International Prices and Endogenous Quality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18314
PY  - 2012
Y2  - August 2012
UR  - http://www.nber.org/papers/w18314
L1  - http://www.nber.org/papers/w18314.pdf
N1  - Author contact info:
Robert C. Feenstra
Department of Economics
University of California, Davis
One Shields Avenue
Davis, CA  95616
Tel: 530/752-7022
Fax: 530/752-9382
E-Mail: rcfeenstra@ucdavis.edu

John Romalis
Australian National University
Research School of Economics
College of Business and Economics
Crisp Building 26, Room 2078
The Australian National University ACT 0200
Australia
Tel: 312-505-2531
E-Mail: jromalis@gmail.com
AB  - The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality. We allow countries to have non-homothetic demand for quality. The optimal choice of quality by firms reflects this non-homothetic demand as well as the costs of production, including specific transport costs, under the “Washington apples” effect. We estimate the implied gravity equation using detailed bilateral trade data for about 200 countries over 1984-2008. Our system identifies quality and quality-adjusted prices, from which we will construct price indexes for imports and exports for each country that will be incorporated into the next generation of the Penn World Table.
ER  -