Goetz, D. and Rodnyansky, A.
Exchange Rate Shocks and Quality Adjustments
WP Number: 1903
Abstract: 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
Author links: Alexander Rodnyansky
PDF: wp1903.pdf 
Open Access Link: 10.17863/CAM.39727
