Income distribution, multi-quality firms and patterns of trade

Hélène Latzer and Alexandre Simons

No 2014003, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We provide a North-South Schumpeterian growth model endogenously generating demand-driven patterns of vertical intra-industrial trade. More precisely, we build a model featuring non-homothetic preferences and income differences, and show that such conditions guarantee the endogenous emergence of multi-location, multi-quality firms. The existence of such firms and wealth heterogeneity among consumers both across and within countries then generate and shape rich patterns of intra-industrial vertical trade and FDI, with the extent of income disparities also conditioning the incentives to invest in R&D of both incumbents and challengers, and by extension the long-run growth rate. We then investigate the impact of within-region redistribution and trade integration policies on the endogenous wage gap across regions, the length of the quality-life cycle and long-run growth. We particularly find that a larger income gap within regions contributes to lowering growth and increasing the inter-regional inequality level. We also find that trade integration boosts long run growth but increases the North-South wage gap.

Keywords: Income distribution; vertical trade in quality; growth; FDI (search for similar items in EconPapers)
JEL-codes: D63 F43 O31 O41 (search for similar items in EconPapers)
Pages: 26
Date: 2014-01-17
New Economics Papers: this item is included in nep-gro and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2014003

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