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Content archived on 2024-04-30

Product Quality Differentiation and Income Distribution in Intra-Industry International Trade: Theory and Evidence


Research Objectives and content

The objective of my proposed research is to investigate the extent causes and consequences of quality differences in imports and exports of manufactured goods that fall in the same product category. It is well known that a large share of world trade in manufactures is intra-industry. Intra-industry trade (IIT (IIT hereafter) can be of two types: trade in different varieties within a certain product group (horizontal IIT) or trade in different qualities of the same good (vertical IIT). This distinction is often overlooked in the trade literature but it makes a substantial difference both in practical and theoretical teens. The dominant theoretical explanation for IIT came in the late 70s with Krugman's model of monopolistic competition and most subsequent contributions followed that tradition. Krugman's model is a model of horizontal product differentiation and can therefore explain only the first type of IIT. In that framework if many varieties have the same price they will all sell a positive quantity there is no such thing as a product that is better than another. Recently Greenaway et al. (1995) have estimated that out half of British IIT is not horizontal but vertical in nature. The implication of this is that monopolistic competition models still leave a substantial share of IIT unexplained. In order to explain trade in vertical differentiated products one must consider income distribution since different levels of quality for the same good can coexist only if consumers have different income levels. Flam and Helpman (1987) and Falvey and Kierzkowski (19X7) introduce models of North-South trade where the North (South) has a comparative advantage at producing high (low) quality versions of a manufactured good. If there is some overlapping in income distribution between the two regions then some quality ranges will be demanded in both countries but produced only in one of them and vertical IIT will arise. Given this general picture. I would like my research to go in the following directions. There is much empirical work to be done in this area; since this is a very policy relevant issue one would really like to know what the data say out it. From a theoretical point of view there are two questions that I find particularly interesting. The existing literature takes income distribution as exogenously determined. However if factor ownership is unevenly distributed and trade affects -factor prices then it also affects income distribution and with quality differentiation this will in turn affect trade patterns. Therefore income distribution and trade patterns can be both endogenously determined given some initial condition. A second point of interest is to study tile role played by multinationals. What quality do they decide to produce when they invest in a developing country? Do they choose a quality specification that they can hope lo sell in tile local market, given income levels and distribution there! Or do they just choose quality targeting their home markets where they will re-export?

Training content (objective benefit and expected impact):

The proposed research will constitute a substantial part of my PhD dissertation at the LSE (please see detailed proposal for a description of my formal training at tile LSE). In my opinion, tile issues tackled are very relevant ill the current debate out the integration of developing countries in the world economy, and it goes without saying that they are particularly relevant for the trade patterns of tile European, Union. The CEP at the LSE is surely one of the best environments in Europe where to carry this research out.

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Houghton Street
United Kingdom

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