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Equity and International Trade

Joseph Francois and Hugo Rojas-Romagosa ()

No 2008-14, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: We develop a generalized approach to the treatment of household inequality aspects of social welfare in general equilibrium models of trade. We follow a dual approach, highlighting how general equilibrium distributional aspects of social welfare related to import protection may be examined alongside corresponding efficiency aspects. We work with a social welfare function that is explicitly separable between mean income and income dispersion. Our results compliment the set of standard inequality results in trade theory that are focused strictly on functional rather than household inequality. As an application of the theoretical framework, we then examine the direct impact of inequality on a government's objective function. We find that equity considerations may serve to counter lobbying interests in both capital-rich and capital-poor countries, though with an opposite marginal impact on the final policy outcome. We also identify a new theoretical basis for potential protectionist bias on the part of welfare maximizing governments in capital-rich countries in the Heckscher-Ohlin model. Our dual framework also offers a possible empirical framework for decomposition of policy-induced price changes into household inequality for a broad class of models.

Keywords: Sen welfare functions; duality; political economy of equity (search for similar items in EconPapers)
JEL-codes: F13 O15 D31 D72 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008-09
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