The Review of Economics and Statistics Vol. 105 No. 1 2023
Exchange Rate Shocks and Quality Adjustments
open access
Abstract
Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that refreshes its product line twice-yearly, we document that higher quality products are more profitable than lower quality ones, but that the number of high-quality products experiences a relative decrease after a large ruble devaluation in 2014. We show that rising firm costs—and not shrinking consumer incomes—explains the reallocation, and rationalize the data with a model that features consumer expenditure switching between high and low qualities. The reallocation to lower quality products reduces average pass-through by 26%.
- DOI
- 10.1162/rest_a_01030
- Volume
- 105
- Issue
- 1
- Pages
- 86-100
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref