Trade, Superstars, and Welfare

Bohdan Kukharskyy

No 120, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: In recent decades, many countries experienced both a rise in top income shares and an increase of income inequality among the top earners. In this paper, I study the role of international trade as a catalyst for this development and analyze the associated welfare effects. I build a simple general equilibrium model that incorporates Lucas’ (1978) idea of individual heterogeneity regarding managerial talents into the framework of intra-industry trade with two symmetric countries. By scrutinizing effects of trade integration on entrepreneurial compensation and endogenous occupational decisions, this model can reproduce the observed pattern of income changes in the top percentiles. Despite positive joint welfare effects of trade liberalization, individual gains from trade may be non-monotonic in agents’ skills. While the welfare of workers and most productive entrepreneurs unambiguously rises, the least- and medium-productive entrepreneurs may be worse off, if their preferences for the traded goods are small enough.

Keywords: Distributional effects of trade; individual welfare; occupational choice; superstars. (search for similar items in EconPapers)
JEL-codes: D31 F12 F16 J24 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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