Income Inequality, Productivity, and International Trade

Wen-Tai Hsu, Lin Lu and Pierre Picard

No 2021029, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper discusses the effect of income inequality on selection and aggregate productivity in a general equilibrium model with non-homothetic preferences. It shows the existence of a negative relationship between the number and quantity of products consumed by an income group and the earnings of other income groups. It also highlights the negative effect of mean-preserving spread of income on aggregate productivity through the softening of firms’ selection. This effect is however mitigated in the presence of international trade. In a quantitative analysis, it is shown that a too large mean-preserving spread of income may harm the rich as it raises firms’ markups on her purchases. This is contrary to the general belief that income inequality benefits the rich.

Pages: 45
Date: 2021-11-18
New Economics Papers: this item is included in nep-cwa and nep-int
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Related works:
Journal Article: Income inequality, productivity, and international trade (2023)
Working Paper: Income Inequality, Productivity, and International Trade (2018)
Working Paper: Income Inequality, Productivity, and International Trade (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2021029

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