The Quality of US Imports and the Consumption Gains from Globalization

Abstract

Lack of detailed data on the characteristics and quality of imported goods poses a challenge for measuring consumption gains from rising imports. To tackle this problem, we propose a method that allows us to identify demand and to infer unobserved quality change using data only on prices and market shares. Our method applies to a wide class of homothetic demand systems that allow for heterogeneity in the degree of substitutability across products. For this class, we also characterize the contribution of changes in quality, price, and variety entry/exit to the aggregate price index. To validate our approach, we show that it estimates price elasticities and quality changes similar to those found by the standard BLP strategy in data on the US auto market, without relying on the information on product characteristics and price instruments used by BLP. Applying our strategy to the US customs data (1989–2006), we find the average contributions of quality, price, and variety to the annual fall in the price of US imports relative to CPI to be 0.95%, 0.60%, and 0.25%, respectively. Using a demand system that ignores the heterogeneity in product substitutability leads to a substantial overestimation of the extent of quality improvements.

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