DEMAND SYSTEM WITH BINDING NON-NEGATIVITY CONSTRAINTS AND THE EFFECT OF PRODUCT QUALITY ON NET TRADE

XIAONAN LIU

This dissertation consists of three studies about demand system with censored data and quality effect on net trade. The first study proposes a Generalized Quadratic Utility (GQU) model for an incomplete demand system with binding non-negativity constraints which is flexible in income and price effects. The model accounts for zero consumption using choke prices identified by the Kuhn-Tucker conditions. The GQU demand system is theoretically consistent and can overcome the analytical and computational difficulties of the Kuhn-Tucker approach. Applying an AIDS specification, we estimate the demand for ale and lager beers and find that household income, age, presence of child, and prices play significant roles in beer consumption. The own-price elasticities are greater than unity. The cross-price elasticities suggest substitutes between ales and lagers. The second study investigates consumers' demand for fresh and processed fruit by applying a two-step estimation procedure to a Quadratic Expenditure System. Using homescan data, we find that household size, income, region, and price significantly affect fruit purchases. We estimate own-price and cross-price elasticities and expenditure elasticities for 18 categories of fruit. More processed fruits serve as substitutes for fresh fruits than complements. Often fresh fruits act as normal goods, and processed fruits as inferior goods. Providing a retail subsidy for fresh fruit or imposing a tax on canned and (or) dried fruit could promote fresh fruit consumption for a healthier diet. The third study determines and compares the effects of product quality on the value of net trade in the manufacturing sector of developed and developing countries. By incorporating the intensity of consumers' preferences for quality, we identify the different quality impacts on net trade. Using manufacturing trade data and a direct measure of quality, we estimate the quality effects for 25 developed countries and 17 developing countries from 1989 to 2010. We conclude that product quality is positively related to net trade, and developed countries face a higher quality effect. The variances of GDP per capita and average number of varieties in this sector could explain the different quality effects.

DEMAND SYSTEM WITH BINDING NON-NEGATIVITY CONSTRAINTS AND THE EFFECT OF PRODUCT QUALITY ON NET TRADE

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