Technology, Trade, and Quality Slopes

Abstract

We investigate the factors that, in addition to preferences, affect the extent to which richer households pay more for a given durable good with respect to their expenditures on nondurables, defined as the quality slope. We show theoretically and confirm empirically that the quality slope decreases in the cost elasticity of quality. Given that this elasticity varies across countries, the quality slope also depends on tariffs. Specifically, it increases in the tariff on middle-income exporters (higher elasticity) and decreases in the tariff on imports from high-income OECD exporters (lower elasticity) to the U.S.

Keywords: Quality Differentiation, Quality Upgrading, Non-homothetic, Technology, International Trade

JEL Classification: F1