Income inequality and the quality of imports

Abstract

This paper studies the role of income inequality in the importing country as a determinant of export unit value and product quality estimated employing information on market shares and prices. Using detailed firm-level data, we find that higher inequality in the destination market is associated with lower unit value and product quality. Noticeably, the negative effect of inequality is stronger in richer destinations. Firm-level heterogeneous responses to market conditions explain changes in unit value and quality. Incumbent exporting firms report lower unit value when income inequality increases, while entrants supply products of lower quality. All in all, our findings show that income inequality is a determinant of import demand which ultimately induces quality and unit value differentials across markets.