Consumer Taste in Trade

This paper documents the importance of consumer taste for the food industry using firm-product level customs data by destination country. We identify consumer taste through the use of a control function approach with novel instruments and estimate it jointly with other demand parameters such as a quality demand shifter, using a flexible demand specification. We find that, on average, consumer taste explains about as much of the variation in export revenue as marginal costs. The contribution of consumer tastes to export revenue variation ranges from 2% to 30% depending on product category in the food industry. Our results also show that consumer taste decreases in distance but this relationship is non-monotonic.

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