Book Description

CHAPTER 1: Income Distribution, Market Structure, and Individual Welfare This essay proposes a new insight on 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 formulated. The case of two types of consumers, which are different in terms of efficiency units of labor they are endowed with, is considered in detail. I show that higher income inequality in the economy can benefit the poor. An increase in 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. In addition, 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. CHAPTER 2: Globalization: Intensive versus Extensive Margins There is empirical evidence that globalization leads to higher income inequality within a country. However, in the economic literature not much attention is paid to the fact that globalization may influence inequality through the consumption channel. In particular, if different groups of consumers consume different sets of goods and in different amounts, then globalization can change consumption patterns and increase or decrease welfare inequality among the groups. In this essay, I look at two margins of globalization, namely trade liberalization (the intensive margin) and a rise in the number of trading partners (the extensive margin), and explore their impact on the economic well-being of different population groups through the consumption channel. I extend the model formulated in Chapter 1 to a world with many symmetric countries. I show that the impact of globalization on the relative welfare of the rich with respect to the poor depends on the margin of globalization considered. In particular, the relative welfare of the rich is first increasing and then decreasing as transportation costs fall. As for a rise in the number of trading partners, the rich always gain more than the poor. Moreover, in some cases the rich can even be worse off from trade liberalization, while welfare of the poor and aggregate welfare both increase. CHAPTER 3: Per Capita Income, Market Access Costs, and Trade Volumes In this essay, I document and analyze several phenomena of trade data. First, countries with higher per capita income tend to have greater trade volumes even after controlling for total income. Second, many country pairs in the world do not trade with each other in one or both directions. Finally, there are substantial costs of access to foreign markets. I construct and estimate a general equilibrium model of trade in an asymmetric world with many countries that squares the above data features. There are two novelties in the essay. First, in my model I introduce a relationship between the costs of access to foreign markets and exporter development level. I show that this relationship can account for the effect of per capita income on trade volumes and explain the many zeros in bilateral trade data. Second, I develop an estimation procedure, which allows me to identify separate effects of variable and fixed costs of trade on trade volumes. The model performs well in fitting the data. The trade elasticities with respect to aggregate and per capita incomes predicted by the model are close to those in the data. I find that the aggregate spending on access to foreign markets constitutes on average around the half of the total export profits.