A growing literature has documented the role of firm heterogeneity within sectors for nominal income inequality. This article explores the implications for household price indices across the income distribution. Using detailed matched U.S. home and store scanner microdata, we present evidence that rich and poor households source their consumption differently across the firm size distribution within disaggregated product groups. We use the data to examine alternative explanations, propose a tractable quantitative model with two-sided heterogeneity that rationalizes the observed moments, and calibrate it to explore general equilibrium counterfactuals. We find that larger, more productive firms sort into catering to the taste of richer households, and that this gives rise to asymmetric effects on household price indices. We quantify these effects in the context of policy counterfactuals that affect the distribution of disposable incomes on the demand side or profits across firms on the supply side.

We develop a simple model to study the interactions between a supplier's financial constraints and contract incompleteness in a vertical relationship. Applied to the analysis of multinational firms' sourcing strategies, the model predicts: (i) that complex and specific inputs are more likely to be sourced from financially developed countries and (ii) that multinationals are more likely to integrate suppliers located in countries with poor financial institutions, especially when trade involves complex goods. These predictions are examined and validated using firm-level trade data on multinational firms with operations in France.

International trade literature tends to focus heavily on the production side of general equilibrium, leaving us with a number of empirical puzzles. There is, for example, considerably less world trade than predicted by Heckscher-Ohlin-Vanek (HOV) models. Trade among rich countries is higher and trade between rich and poor countries lower than suggested by HOV and other supply-driven theories, and trade-to-GDP ratios are higher in rich countries. Our approach focuses on the relationship between characteristics of goods and services in production and characteristics of preferences. In particular, we find a strong and significant positive correlation of more than 45% between a good’s skilled-labor intensity and its income elasticity, even when accounting for trade costs and cross-country price differences. Exploring the implications of this correlation for empirical trade puzzles, we find that it can reduce HOV’s overprediction of the variance of the net factor content of trade relative to that in the data by about 60%. Since rich countries are relatively skilled-labor abundant, they are relatively specialized in consuming the same goods and services that they are specialized in producing, and so trade more with one another than with poor countries. We also find a positive sector-level correlation between income elasticity and a sector’s tradability, which helps explain the higher trade-to-GDP ratios in high-income relative to low-income countries.

We propose and implement a new approach that allows us to estimate income-specific changes in household welfare in contexts where well-measured prices are not available for important subsets of consumption. Using rich but widely available expenditure survey microdata, we show that we can recover income-specific equivalent and compensating variations from horizontal shifts in what we call “relative Engel curves”—as long as preferences fall within the broad quasi-separable class (Gorman 1970, 1976). Our approach is flexible enough to allow for nonparametric estimation at each point of the income distribution. We apply the methodology to estimate inflation and welfare changes in rural India between 1987 and 2000. Our estimates reveal that lower rates of inflation for the rich erased the real income convergence found in the existing literature that uses the subset of consumption with well-measured prices to calculate inflation.

We propose two distinct approaches to the measurement of industry upstreamness (or average distance from final use) and show that they yield an equivalent measure. Furthermore, we provide two additional interpretations of this measure, one of them related to the concept of forward linkages. We construct this measure for 426 industries using the 2002 US input-output Tables. We also construct our measure using data from selected countries in the OECD STAN database. Finally, we present an application of our measure that explores the determinants of the average upstreamness of exports at the country level using trade flows for 2002.