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Income Inequality, Productivity, and International Trade

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  • Wen-Tai Hsu

    (School of Economics, Singapore Management University)

  • Lin Lu

    (Department of Economics, Tsinghua University)

  • Pierre Picard

    (CREA, Université du Luxembourg)

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 ?rms’ 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 ?rms’ markups on their purchases. This is contrary to the general belief that income inequality bene?ts the rich.

Suggested Citation

  • Wen-Tai Hsu & Lin Lu & Pierre Picard, 2018. "Income Inequality, Productivity, and International Trade," DEM Discussion Paper Series 18-14, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:18-14
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    File URL: https://hdl.handle.net/10993/39153
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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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