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Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains

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  • Reto Foellmi
  • Manuel Oechslin

Abstract

Globalization increasingly involves less-developed countries (LDCs), i.e., economies which usually suffer from severe imperfections in their financial systems. Taking these imperfections seriously, we analyze how credit frictions affect the distributive impact of trade liberalizations. We find that free trade significantly widens income differences among firm owners in LDCs: While wealthy entrepreneurs are better off, relatively poor business people lose. Intuitively, with integrated markets, profit margins shrink -- which makes access to credit particularly difficult for the least affluent agents. Richer entrepreneurs, by contrast, win because they can take advantage of new export opportunities. Our findings resonate well with a number of empirical regularities, in particular with the observation that some liberalizing LDCs have observed a surge in top-income shares.

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  • Reto Foellmi & Manuel Oechslin, 2010. "Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains," Diskussionsschriften dp1006, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1006
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    More about this item

    Keywords

    Wealth inequality; trade liberalization; credit market frictions; top incomes;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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