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Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains

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  • Foellmi, Reto
  • Oechslin, Manuel

Abstract

Globalization increasingly involves less-developed countries (LDCs), i.e., economies which usually suffer from severe imperfections in their financial systems. Taking these imperfections seriously, we analyze how credit frictions affect the distributive impact of trade liberalizations. We find that free trade significantly widens income differences among firm owners in LDCs: While wealthy entrepreneurs are better off, relatively poor business people lose. Intuitively, with integrated markets, profit margins shrink -- which makes access to credit particularly difficult for the least affluent agents. Richer entrepreneurs, by contrast, win because they can take advantage of new export opportunities. Our findings resonate well with a number of empirical regularities, in particular with the observation that some liberalizing LDCs have observed a surge in top-income shares.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7520.

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Date of creation: Oct 2009
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Handle: RePEc:cpr:ceprdp:7520

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Keywords: credit market frictions; top incomes; trade liberalization; Wealth inequality;

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Citations

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Cited by:
  1. Mauro Caselli, 2008. "Does wealth inequality reduce the gains from trade?," Economics Series Working Papers WPS/2008-30, University of Oxford, Department of Economics.
  2. Foellmi, Reto & Oechslin, Manuel, 2012. "Globalization and Productivity in the Developing World," Economics Working Paper Series 1203, University of St. Gallen, School of Economics and Political Science.
  3. Carré, Martine & Riboni, Alessandro, 2012. "Unequal societies, Unequal Terms of Trade and Trade Policy," Economics Papers from University Paris Dauphine 123456789/10331, Paris Dauphine University.
  4. Taiji Furusawa & Noriyuki Yanagawa, 2010. "Firm Heterogeneity under Financial Imperfection: Impacts of Trade and Capital Movement," CIRJE F-Series CIRJE-F-768, CIRJE, Faculty of Economics, University of Tokyo.
  5. Spiros Bougheas & Rod Falvey, 2011. "The Impact of Financial Market Frictions on Trade Flows, Capital Flows and Economic Development," CESifo Working Paper Series 3321, CESifo Group Munich.
  6. Martin Grossmann & Helmut Dietl, 2012. "Asymmetric contests with liquidity constraints," Public Choice, Springer, vol. 150(3), pages 691-713, March.

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