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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

Abstract: 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
Date: 2018-07-11
New Economics Papers: this item is included in nep-int and nep-sea
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