Exchange Rate Shocks and Quality Adjustments
Daniel Goetz and
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that varies its offerings twice-yearly, we document that ruble devaluations are associated with a reduction in the observed material quality of products imported for resale, but that higher quality goods are also more profitable. We reconcile these facts using a simple multi-product sourcing model that features a demand system with expenditure switching, where more profitable products can be dropped more quickly after a cost shock. The estimated model shows that quality downgrading reduces average passthrough by 6% and has meaningful consequences for welfare.
JEL-codes: E30 F14 F31 L11 L15 L16 L81 M11 (search for similar items in EconPapers)
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