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Exchange Rate Shocks and Quality Adjustments

Monday 25th February 2019
CINET:
1903
Goetz, D. and Rodnyansky, A.
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.
Keywords
E30
F14
F31
L11
L15
L16
L81
M11
Themes
transmission
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