Publication Type

Working Paper

Version

publishedVersion

Publication Date

7-2018

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 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.

Discipline

Income Distribution | International Economics

Research Areas

Applied Microeconomics

First Page

1

Last Page

46

Publisher

SMU Economics and Statistics Working Paper Series, No. 13-2018

City or Country

Singapore

Copyright Owner and License

Authors

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