Income Inequality, Productivity, and International Trade
Wen-Tai Hsu (),
Lin Lu () and
Pierre Picard ()
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Lin Lu: Department of Economics, Tsinghua University
No 13-2018, Economics and Statistics Working Papers from Singapore Management University, School of Economics
This paper discusses the effect of income inequality on selection and aggregate productivity in a general equilibrium model with non-homothetic preferences. It shows the existence of a negative relationship between the number and quantity of products consumed by an income group and the earnings of other income groups. It also highlights the negative effect of a mean-preserving spread of income on aggregate productivity through the softening of firms’ selection. This effect is however mitigated in the presence of international trade. In a quantitative analysis, it is shown that an excessively large mean-preserving spread of income may harm the rich as it raises firms’ markups on their purchases. This is contrary to the general belief that income inequality benefits the rich.
Pages: 48 pages
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Working Paper: Income Inequality, Productivity, and International Trade (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:smuesw:2018_013
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