Income inequality, productivity, and international trade

• Main Authors: HSU, Wen-Tai, LU, Lin, PICARD, Pierre
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Income Distribution; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2188; https://ink.library.smu.edu.sg/context/soe_research/article/3187/viewcontent/monopolistic_income_DP_07112018_.pdf
• Institution: Singapore Management University

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 firms’ 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 firms’ markups on their purchases. This is contrary to the general belief that income inequality benefits the rich.