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Trade, Superstars, and Welfare

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  • Bohdan Kukharskyy

Abstract

In recent decades, many countries experienced both a rise in top income shares and an increase of income inequality among the top earners. In this paper, I study the role of international trade as a catalyst for this development and analyze the associated welfare effects. I build a simple general equilibrium model that incorporates Lucas’ (1978) idea of individual heterogeneity regarding managerial talents into the framework of intra-industry trade with two symmetric countries. By scrutinizing effects of trade integration on entrepreneurial compensation and endogenous occupational decisions, this model can reproduce the observed pattern of income changes in the top percentiles. Despite positive joint welfare effects of trade liberalization, individual gains from trade may be non-monotonic in agents’ skills. While the welfare of workers and most productive entrepreneurs unambiguously rises, the least- and medium-productive entrepreneurs may be worse off, if their preferences for the traded goods are small enough.

Suggested Citation

  • Bohdan Kukharskyy, 2012. "Trade, Superstars, and Welfare," Working Papers 120, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:120_kukharskyy
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    Cited by:

    1. Behrens, Kristian & Zhelobodko, Evgeny & Pokrovsky, Dmitry, 2014. "Market Size, Entrepreneurship, and Income Inequality," CEPR Discussion Papers 9831, C.E.P.R. Discussion Papers.
    2. Morten Olsen & Joshua Gottlieb & David Hemous & Jeffrey Clemens, 2017. "The Spill-over Effects of Top Income Inequality," 2017 Meeting Papers 332, Society for Economic Dynamics.

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    More about this item

    Keywords

    Distributional effects of trade; individual welfare; occupational choice; superstars.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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