Internal Geography and the Effect of Imports on Non-Homothetic Consumption Patterns within the U.S

It is known that rich households purchase goods of higher prices and quality than the poor ones. In this paper, we show that this difference is systematically related to the variation in access to imports across states within the U.S. Specifically, we investigate to what degree imports affect the differences in prices of durables purchased by households across income distribution. Our identification of exogenous variation in imports relies on differences in the internal distance of imports across states and products. We find that (1) the differences in purchase prices of durables between rich and poor households are more pronounced in states that receive more imports and (2) those differences are driven by the effect of imports on the poor, not the rich, households. Both findings are consistent with the predictions of a novel model that combines non-homothetic preferences with specific transportation costs. ∗Department of Economics, Indiana University, Wylie Hall Rm 301, 100 S. Woodlawn, Bloomington, IN 47405-7104; e-mail: [email protected] †Department of Economics and Finance, University of Wyoming, Dept 3985, 1000 E University Ave, Laramie, WY 82071, e-mail: [email protected]