Consumer Heterogeneity And The Impact Of Trade Liberalization: How Representative Is The Representative Agent Framework?
Source: Swiss National Bank
While it is well established that across-country taste differences are associated with "Home market effects", there is very limited analysis of how such preference heterogeneity impacts the aggregate volume of trade and the welfare gains from liberalization. The author develops a structural model of aggregate demand featuring products with heterogeneous attributes, consumers with heterogeneous tastes for attributes, and across-country differences in the distribution of tastes. The impact of across-country taste differences depends on whether the domestic industry can adjust to the mismatch between the attribute composition of imports and the domestic distribution of tastes.