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DECTI Trade Seminar: Tariff Pass-through, Firm Heterogeneity and Product Quality

Location:   MC8-100
Begins:   May 01, 2012 12:30
Ends:   May 01, 2012 14:00
Contact Person:   Anna Regina Rillo Bonfield

PresenterRodney Ludema, Georgetown University (joint with Zhi Yu, Georgetown University)

Abstract: Previous studies on tariff pass-through have been conducted at the industry level. This paper is the first attempt to explore tariff pass-through at the firm level, and to investigate how it  depends on firm heterogeneity in productivity and product differentiation in quality. Using an extended version of the Melitz and Ottaviano (2008) model, we show that exporting firms absorb tariff changes by adjusting both their markups and product quality, which leads to an incomplete tariff pass-through. Moreover, the absolute value of tariff absorption elasticity (the percentage change in the tariff-exclusive export price in response to a one percent change in the gross tariff rate) negatively depends on firm productivity for products with high scope for quality differentiation, but positively
depends on firm productivity for products with low scope for quality differentiation. Using the U.S. transaction-level export data and plant-level manufacturing data, we find evidence for these predictions. The firm-level tariff absorption elasticity is -0:87 on average. Pooled regressions reveal that the tariff absorption elasticity is higher (in terms of absolute value) for low productivity firms (-1:27) and lower for high productivity firms (-0:44). Estimation done separately on quality differentiated goods and quality homogeneous goods finds that the inverse relationship between tariff absorption elasticity and firm productivity is more pronounced for quality differentiated goods and non-existent for
quality homogeneous goods, which is consistent with the model.

Paper (pdf - 402k)

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