Do the Rich (Really) Consume Higher-Quality Goods? Evidence from International Trade Data

Abstract

Using average import prices (unit values) as proxies for quality, a large body of the international trade literature finds both theoretical and empirical support for the positive relationship between importer income and quality of imports. Several authors, however, argue that the empirical evidence of the link between income and product quality might be spurious, since import prices could be affected by other factors than product quality. This paper takes into account this issue with a new theoretical and empirical approach. Building on Khandelwal’s (2010) discrete choice model approach, where quality is inferred by quantitative market shares as well as unit values, we develop a model that allows for willingness to pay for quality to vary with income. We empirically validate the theoretical relationship between importer income and product quality by using the Eurostat’s COMEXT database, which collects customs data reported by EU countries at 8-digit disaggregation. Our estimations support the positive link between consumer income and product quality, which is also robust across sectors.