Top Income Inequality, Aggregate Saving and the Gains from Trade

Lixin Tang ()

2014 Papers from Job Market Papers

Abstract: I study the implications of top income inequality for the gains from trade in a dynamic model. I argue that higher top income inequality among entrepreneurs can increase the gains from trade for workers. In the model, entrepreneurs face uninsurable idiosyncratic productivity risk, and thus save. Since the most productive entrepreneurs have the highest saving rate and are the ones that export, a reduction in trade costs increases their share of total pro ts and their savings, which leads to a large increase in the aggregate supply of capital. The welfare gains from trade for workers in the model are 6.4%, which are larger than in comparable benchmarks without top income inequality or capital accumulation. While the typical entrepreneur loses in consumption because of higher labor costs, aggregate consumption by entrepreneurs increases by 3.6%. Empirically, I find a strong relationship between trade openness and the national saving rate in a large sample of countries, consistent with the model. I find a much weaker relationship between trade openness and the investment rate.

JEL-codes: F1 F4 F6 O1 O4 (search for similar items in EconPapers)
Date: 2014-11-06
New Economics Papers: this item is included in nep-dge, nep-ent, nep-int and nep-pbe
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ideas.repec.org/jmp/2014/pta581.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jmp:jm2014:pta581

Access Statistics for this paper

More papers in 2014 Papers from Job Market Papers
Bibliographic data for series maintained by RePEc Team ().