Income Distribution, Market Structure, and Individual Welfare

Alexander Tarasov

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores how income distribution influences market structure and affects the economic well-being of different groups. It shows that inequality may be good for the poor via a trickle-down effect operating through entry. I consider a general equilibrium model of monopolistic competition with free entry, heterogenous firms and consumers that share identical but non-homothetic preferences. The general model is solved. The case of two types of consumers, rich and poor, is considered in detail. I show that higher income inequality in the economy can benefit the poor. An increase in the personal income of the rich raises welfare of the poor, while an increase in the fraction of the rich has an ambiguous impact on the poor: welfare of the poor has an inverted U shape as a function of the fraction of the rich. At the same time, an increase in the personal income of the rich together with a decrease in the fraction of the rich keeping the aggregate income in the economy fixed raises the well-being of the poor. I also analyze the effect of changes in market size and entry cost. I show that the rich gain more from an increase in market size and lose more from an increase in the cost of entry than the poor.

JEL-codes: D31 D43 L11 L13 (search for similar items in EconPapers)
Date: 2007-03, Revised 2008-01
New Economics Papers: this item is included in nep-com, nep-hap and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://mpra.ub.uni-muenchen.de/7682/1/MPRA_paper_7682.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/8250/2/MPRA_paper_8250.pdf revised version (application/pdf)

Related works:
Journal Article: Income Distribution, Market Structure, and Individual Welfare (2009)
Working Paper: Income distribution, market structure, and individual welfare (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:7682

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