The unequal gains from product innovations: evidence from the U.S. Retail sector

This article examines how product innovations led to inflation inequality in the United States from 2004 to 2015. Using scanner data from the retail sector, I find that annual inflation for retail products was 0.661 (std. err. 0.0535) percentage points higher for the bottom income quintile relative to the top income quintile. When including changes in product variety over time, this difference increases to 0.8846 (std. err. 0.0739) percentage points a year. In CEX-CPI data covering the full consumption basket, the annual inflation difference is 0.368 (std. err. 0.0502) percentage points. I investigate the following hypothesis: (i) the relative demand for products consumed by high-income households increased because of growth and rising inequality; (ii) in response, firms introduced more new products catering to such households; (iii) as a result, the prices of continuing products in these market segments fell due to increased competitive pressure. Using a shift-share research design, I find causal evidence that increasing relative demand leads to increasing product variety and lower inflation for continuing products. A calibration indicates that the hypothesized channel accounts for a large fraction (over 50%) of observed inflation inequality

High-frequency changes in shopping behaviours, promotions and the measurement of inflation: evidence from the Great Lockdown

We use real-time scanner data in Great Britain during the COVID-19 pandemic to investigate the drivers of the inflationary spike at the beginning of lockdown and to quantify the impact of high-frequency changes in shopping behaviours and promotions on inflation measurement. Although changes in product-level expenditure shares were unusually high during lockdown, we find that the induced bias in price indices that do not account for expenditure switching is not larger than in prior years. We also document substantial consumer switching towards online shopping and across retailers, but show this was not a key driver of the inflationary spike. In contrast, a reduction in price and quantity promotions was key to driving higher inflation, and lower use of promotions by low-income consumers explains why they experienced moderately lower inflation. Overall, changes in shopping behaviours played only a minor role in driving higher inflation during lockdown; higher prices were the main cause, in particular through a reduced frequency of promotions

Is funding a large universal basic income feasible? A quantitative analysis of UBI with endogenous labour supply

This article addresses a key point of contention in the ongoing UBI debate: given the way labour supply responds to tax changes, is it possible to fund a large UBI using income taxes? Using recent empirical estimates and quantitative tools from the public economics literature, we assess what level of UBI may be funded given the fall in labour supply that could be induced by the required larger taxes. Despite a prevalent belief that a large UBI would be fiscally irresponsible, we find that it is possible to fund a large annual UBI over £11,000 per person, that it could be funded through a 45% flat tax, but that increasing taxes on the most affluent alone would be insufficient. Our findings highlight an important tension: a large UBI is possible, but it requires large tax rates, including for those at the bottom of the income distribution

Crafting intellectual property rights: implications for patent assertion entities, litigation, and innovation

We show that examiner-driven variation in patent rights leads to quantitatively large impacts on several patent outcomes, including patent value, citations, and litigation. Notably, Patent Assertion Entities (PAEs) overwhelmingly purchase patents granted by "lenient" examiners. These examiners issue patents that are more likely to be litigated by both PAEs and conventional companies, and that also have higher invalidity rates. PAEs leverage a specific friction in the patent system that stems from lenient examiners and affects litigation more broadly. These patterns indicate that there is much at stake during patent examination, contradicting the influential "rational ignorance" view of the patent office

Nonparametric measurement of long-run growth in consumer welfare

How should we measure long-run changes in consumer welfare? This paper proposes a nonparametric approach that is valid under arbitrary preferences that depend on observable consumer characteristics, e.g. when expenditure shares vary with income. Our approach only requires data on the consumption baskets of a cross section of consumers facing a common set of prices. Using nominal expenditures under a constant set of prices as our money-metric for real consumption (welfare), we derive a consistent measure of its growth in terms of a correction to the conventional measures based on price index formulas. Our correction ac-counts for the cross-sectional dependence of the measured price indices on consumer income and other characteristics. We use nonparametric methods to approximate these corrections and provide bounds on the resulting approximation errors. Applying the approach to the measurement of growth in US real consumption per capita, we find a sizable correction to the standard measures of growth in the post-war era, a period of fast growth combined with substantial inflation gaps across income groups

What are the price effects of trade? Evidence from the US for quantitative trade models

This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines

Are trade wars class wars? The importance of trade-induced horizontal inequality

What is the nature of the distributional effects of trade? This paper demonstrates conceptually and empirically the importance of "trade-induced horizontal inequality," i.e., inequality brought about by trade shocks that occurs among workers with the same level of earnings prior to the shock. While this type of inequality does not affect the income distribution, it generates winners and losers at all income levels and may thus affect political support for trade policy. To quantify the horizontal inequality and changes in the income distribution induced by trade in a data-driven way, we develop a characterization of the welfare impacts, governed by simple and intuitive statistics of labor market and consumption exposure to trade. This characterization holds in a class of quantitative trade models allowing for a broad set of preferences, including non-homothetic, and production functions. Taking this framework to U.S. data, we find substantial heterogeneity in exposure and thus in the welfare effects of trade shocks across workers, with horizontal inequality as the dominant force. Over 99% of the variance of welfare changes from trade shocks arise within income deciles, rather than across. This finding runs against a popular narrative that "trade wars are class wars"

What are the price effects of trade? Evidence from the US and implications for quantitative trade models

This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines