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Firm Productivity, Occupational Choice, and Inequality in a Global Economy

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  • Elias Dinopoulos

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  • Bulent Unel

    ()

Abstract

This study proposes a simple theory of trade with endogenous firm productivity, occupational choice, and income inequality. Individuals with different managerial talent choose to become self-employed entrepreneurs or workers. Entrepreneurs enhance firm productivity by investing in managerial capital. The model generates three income classes: low-income workers facing the prospect of unemployment; middle-income entrepreneurs managing domestic firms; and high-income entrepreneurs managing global firms. A reduction in per-unit trade costs raises productivity of global firms, reduces productivity of domestic firms, and worsens personal income distribution by generating labor-market polarization. A reduction in fixed exporting costs reduces productivity of every firm and has an ambiguous effect on personal income distribution. Trade-liberalization policies raise unemployment and improve welfare.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2014-04.

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Handle: RePEc:lsu:lsuwpp:2014-04

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  1. Hartmut Egger & Udo Kreickemeier, . "Fairness, Trade, and Inequality," Discussion Papers 08/19, University of Nottingham, GEP.
  2. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  3. Alla Lileeva & Daniel Trefler, 2007. "Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants," NBER Working Papers 13297, National Bureau of Economic Research, Inc.
  4. Zvi Griliches, 1998. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 17-45 National Bureau of Economic Research, Inc.
  5. Melitz, Marc J. & Trefler, Daniel, 2012. "Gains from Trade When Firms Matter," Scholarly Articles 10914282, Harvard University Department of Economics.
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  7. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," NBER Working Papers 12885, National Bureau of Economic Research, Inc.
  8. Thomas Lemieux, 2008. "The changing nature of wage inequality," Journal of Population Economics, Springer, vol. 21(1), pages 21-48, January.
  9. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1999. "Trade and search generated unemployment," Journal of International Economics, Elsevier, vol. 48(2), pages 271-299, August.
  10. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  11. Davidson, Carl & Matusz, Steven J. & Shevchenko, Andrei, 2008. "Globalization and firm level adjustment with imperfect labor markets," Journal of International Economics, Elsevier, vol. 75(2), pages 295-309, July.
  12. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  13. Monte, Ferdinando, 2009. "Skill Bias, Trade, and Wage Dispersion," MPRA Paper 14719, University Library of Munich, Germany.
  14. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1988. "The Structure of Simple General Equilibrium Models with Frictional Unemployment," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1267-93, December.
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