An Adverse Social Welfare Effect of Quadruply Gainful Trade

Oded Stark and Grzegorz Kosiorowski
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Grzegorz Kosiorowski: Cracow University of Economics

No 13761, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Acknowledging that individuals dislike having low relative income renders trade less attractive when seen as a technology that integrates two economies by merging separate social spheres into one. We define a "trembling trade" as a situation in which gains from trade are less than losses in relative income, with the result that global social welfare is reduced. We show that a "trembling trade" can arise even when trade is more gainful in four ways: through trade the absolute income of everyone increases, the income gap in both economies is reduced, as is the income gap between the trading economies. However, trade brings populations, economies, or markets that were not previously connected closer together in social space. As a consequence, separate social spheres merge, and people's social space and their comparators are altered. Assuming that people like high (absolute) income and dislike low relative income, the aggregate increase in unhappiness caused by the trade-induced escalation in relative deprivation can result in a negative overall impact of trade on (utilitarian-measured) social welfare, if the absolute income gains are not large enough to mitigate the relative income losses.

Keywords: increase of incomes; decrease of income gaps; integration; change of social space; low relative income; quadruply gainful trade; gains from trade; "trembling trade"; social welfare (search for similar items in EconPapers)
JEL-codes: D31 D63 F10 F15 R12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-10
New Economics Papers: this item is included in nep-int
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Published - published in: East Asian Economic Review, 2020, 24 (3), 207-235

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Related works:
Journal Article: An Adverse Social Welfare Effect of Quadruply Gainful Trade (2020)
Working Paper: An adverse social welfare effect of guadruply gainful trade (2020)
Working Paper: An adverse social welfare effect of quadruply gainful trade (2020)
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