Income Distribution, Market Structure, and Individual Welfare
This paper explores how income distribution influences market structure and affects the economic well-being of different groups. It shows that inequality may be good for the poor via a trickle-down effect operating through entry. I consider a general equilibrium model of monopolistic competition with free entry, heterogenous firms and consumers that share identical but non-homothetic preferences. The general model is solved. The case of two types of consumers, rich and poor, is considered in detail. I show that higher income inequality in the economy can benefit the poor. An increase in the personal income of the rich raises welfare of the poor, while an increase in the fraction of the rich has an ambiguous impact on the poor: welfare of the poor has an inverted U shape as a function of the fraction of the rich. At the same time, an increase in the personal income of the rich together with a decrease in the fraction of the rich keeping the aggregate income in the economy fixed raises the well-being of the poor. I also analyze the effect of changes in market size and entry cost. I show that the rich gain more from an increase in market size and lose more from an increase in the cost of entry than the poor.
|Date of creation:||Mar 2007|
|Date of revision:||Jan 2008|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rodrik, Dani & Alesina, Alberto, 1994.
"Distributive Politics and Economic Growth,"
4551798, Harvard University Department of Economics.
- Persson, T. & Tabellini, G., 1993.
"Is Inequality Harmful for Growth,"
537, Stockholm - International Economic Studies.
- Krishna, Kala & Yavas, Cemile, 2005. "When trade hurts: Consumption indivisibilities and labor market distortions," Journal of International Economics, Elsevier, vol. 67(2), pages 413-427, December.
- Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
- Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
- Devashish Mitra & Vitor Trindade, 2005.
"Inequality and trade,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
- Robert J. Waldmann, 1992. "Income Distribution and Infant Mortality," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1283-1302.
- Foellmi, Reto & Zweimüller, Josef, 2005.
"Income Distribution and Demand-Induced Innovations,"
CEPR Discussion Papers
4985, C.E.P.R. Discussion Papers.
- Reto Foellmi & Josef Zweimuller, 2006. "Income Distribution and Demand-Induced Innovations," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 941-960.
- Reto Foellmi & Josef Zweimï¿½ller, . "Income Distribution and Demand-induced Innovations," IEW - Working Papers 212, Institute for Empirical Research in Economics - University of Zurich.
- Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1989.
"Income Distribution, Market Size, and Industrialization,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 104(3), pages 537-564.
- Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
- Reto Foellmi & Josef Zweimueller, .
"Inequality, Market Power, and Product Diversity,"
IEW - Working Papers
145, Institute for Empirical Research in Economics - University of Zurich.
- Nancy L. Stokey, 1991. "The Volume and Composition of Trade Between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 63-80.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:7682. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.