Entrepreneur Income Inequality, Aggregate Saving and the Gains from Trade

Review of Economic Dynamics

Lixin Tang

Abstract

Although research has examined the effects of trade on entrepreneur income inequality, the welfare implications of such effects are not well understood. To address this issue, I develop a dynamic model of trade with incomplete markets. In the model, exporting entrepreneurs have both the highest profit and the highest saving rate in the economy. An increase in trade openness increases the share of total profits received by exporters, and thus increases the aggregate supply of capital in the economy. The model reconciles a number of documented stylized facts. Quantitative analysis shows that the novel mechanism in the model amplifies the trade-induced increase in capital stock by 2.1 percentage points, and the trade-induced increase in wage by 0.7 percentage point relative to a comparable benchmark.

Keywords: Top income shares; Inequality; Aggregate saving rate; Capital accumulation; Gains from trade

JEL classification: F60; 016

Read more: https://doi.org/10.1016/j.red.2020.05.001