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Trade in quality and income distribution: an analysis of the enlarged EU market

Author

Listed:
  • Hélène Latzer
  • Florian Mayneris
Abstract
This paper contributes to the understanding of the determinants of country-level comparative advantages in terms of quality. More precisely, while the literature has mainly focused so far on supply-side determinants of such comparative advantages, we investigate both theoretically and empirically the role played by income distribution (average income and level of inequalities) of a country on the quality of its exports. Doing so, we provide new insights on the existence of demand-based determinants of the quality content of a country’s exports, in line with the Linder (1961) hypothesis, claiming that firms produce and export goods suited to the specific tastes of their local consumers. We build a model with economies of scale where non-homothetic preferences and within-country income differences determine the quality composition of production and exports. Having neutralized any supply-side comparative advantage, we show that richer countries produce and export higher quality goods, while the level of inequalities has an heterogenous impact, positively affecting the quality content of exports for rich enough countries only. We then corroborate our theoretical predictions on bilateral trade data for the enlarged European Union (EU), an integrated market displaying significant heterogeneity in terms of both average income and within-country inequalities of its members. Furthermore, we are able to show that in terms of magnitude of the effects, inequalities are a second-order demand-based determinant of the quality of exports as compared to average income.

Suggested Citation

  • Hélène Latzer & Florian Mayneris, 2011. "Trade in quality and income distribution: an analysis of the enlarged EU market," Working Papers of BETA 2011-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2011-21
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Bastos, Paulo & Silva, Joana, 2010. "The quality of a firm's exports: Where you export to matters," Journal of International Economics, Elsevier, vol. 82(2), pages 99-111, November.
    2. Anna Ray & Antoine Vatan, 2013. "Demand for Luxury Goods in a World of Income Disparities," PSE - G-MOND WORKING PAPERS hal-00959398, HAL.
    3. Lisandra Flach & Eckhard Janeba, 2017. "Income inequality and export prices across countries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(1), pages 162-200, February.
    4. Yılmaz Ensar, 2016. "Market Imperfections and Income Distribution," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 1147-1167, April.
    5. Julien Jacob, 2011. "Innovation and diffusion in risky industries under liability law: the case of “double-impact” innovations," Working Papers of BETA 2011-24, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    6. Anna Ray & Antoine Vatan, 2013. "Demand for Luxury Goods in a World of Income Disparities," Working Papers hal-00959398, HAL.
    7. Anna Ray & Antoine Vatan, 2013. "Demand for Luxury Goods in a World of Income Disparities," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00959398, HAL.
    8. Štefan Bojnec & Imre Fertő, 2017. "Quality Upgrades of EU Agri-Food Exports," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(1), pages 269-279, February.
    9. ROELS, Guillaume & CHEVALIER, Philippe & WEI, Ying, 2012. "United we stand? Coordinating capacity investment and allocation in joint ventures," LIDAM Discussion Papers CORE 2012045, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Paul Maarek & Renaud Bourlès & Michael T.Dorsch, 2014. "Income Redistribution and the Diversity of Consumer Goods," THEMA Working Papers 2014-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    11. Renaud Bourlès & Michael T. Dorsch & Paul Maarek, 2019. "Income Taxation and the Diversity of Consumer Goods: A Political Economy Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 960-993, July.
    12. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    13. Houda Ghaya, 2011. "Board of Directors’ Involvement in Strategic Decision Making Process: Definition and Literature Review," Working Papers of BETA 2011-22, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    14. Miao, Zhuang & Li, Yifan & Duan, Sisong, 2020. "Income inequality of destination countries and trade patterns: Evidence from Chinese firm-level data," MPRA Paper 99441, University Library of Munich, Germany.
    15. Ferto, Imre & Bojnec, Stefan, 2015. "Quality upgrading in the European-Union agri-food exports," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204225, Agricultural Economics Society.

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    More about this item

    Keywords

    Product quality; Income distribution; Trade; Economies of scale; European Union.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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