Explaining Import Variety and Quality: The Role of the Income Distribution

We examine a generalized version of Flam and Helpman’s (1987) model of vertical differentiation that maps cross-country differences in income distributions to variations in import variety and price distributions. The theoretical predictions are examined and confirmed using micro data on income from the Luxemburg Income Study for 30 countries over 20 years. The pairs of importers whose income distributions look more similar have more export partners in common and more similar import price distributions. Similarly, the importers whose income distributions look more like the world buy from more exporters and have import price distributions that look more like the world.