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Trade liberalization, firm entry, and income inequality

Author

Listed:
  • Chi‐Chur Chao
  • Mong Shan Ee
  • Xuan Nguyen
  • Eden S. H. Yu

Abstract

This paper examines the short‐ and long‐run effects of trade liberalization via tariff reductions on income inequality in an economy, which is characterized by an imperfectly competitive urban manufacturing sector and a perfectly competitive rural agricultural sector. Tariff reductions reduce domestic output in the importable urban manufacturing sector, leading to shifts of capital from the urban sector to the rural agricultural sector. This can narrow the wage gap between skilled and unskilled labor in the short run. However, the lowered capital cost attracts new firms, and subsequently excessive entry of firms, to the urban manufacturing sector. This firm entry effect can mitigate the favorable effect of tariff reductions on wage inequality in the long run. Empirical study confirms the findings.

Suggested Citation

  • Chi‐Chur Chao & Mong Shan Ee & Xuan Nguyen & Eden S. H. Yu, 2019. "Trade liberalization, firm entry, and income inequality," Review of International Economics, Wiley Blackwell, vol. 27(4), pages 1021-1039, September.
    • Handle: RePEc:bla:reviec:v:27:y:2019:i:4:p:1021-1039
    DOI: 10.1111/roie.12413
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    Cited by:

    1. Khan, Muhammad Aamir & Walmsley, Terrie & Mukhopadhyay, Kakali, 2021. "Trade liberalization and income inequality: The case for Pakistan," Journal of Asian Economics, Elsevier, vol. 74(C).
    2. Leonard F. S. Wang & Ji Sun, 2023. "Corporate profit tax, firm entry with unemployment, and income inequality," Bulletin of Economic Research, Wiley Blackwell, vol. 75(2), pages 380-392, April.
    3. Chao, Chi-Chur & Trinh, Cong Tam & Nguyen, Xuan, 2023. "Carbon neutrality and wage inequality in a sustainable economy: New evidence from business dynamism," Economic Modelling, Elsevier, vol. 127(C).
    4. Julio Vicente Cateia & Luc Savard, 2025. "Trade and distribution in Guinea-Bissau: A computable general equilibrium analysis," International Economics and Economic Policy, Springer, vol. 22(1), pages 1-30, February.
    5. Dongmin Kong & Mengxu Xiong, 2021. "Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 802-837, September.
    6. Shreya Roy & Sugata Marjit & Bibek Ray Chaudhuri, 2022. "Role of Artificial Intelligence in Intra-Sectoral Wage Inequality in an Open Economy: A Finite Change Approach," CESifo Working Paper Series 9862, CESifo.
    7. Chi‐Chur Chao & May Hu & Xuan Nguyen, 2022. "Manufacturing capital utilisation, firm dynamics and wage inequality," The World Economy, Wiley Blackwell, vol. 45(12), pages 3947-3970, December.

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