Template-Type: ReDIF-Paper 1.0

Author-Name: Bohdan Kukharskyy
Author-X-Name-First: Bohdan 
Author-X-Name-Last: Kukharskyy

Title: Trade, Superstars, and Welfare 
	
Abstract: In recent decades, many countries experienced both a rise in top income shares and an increase
of income inequality among the top earners. In this paper, I study the role of international trade
as a catalyst for this development and analyze the associated welfare effects. I build a simple
general equilibrium model that incorporates Lucas’ (1978) idea of individual heterogeneity
regarding managerial talents into the framework of intra-industry trade with two symmetric
countries. By scrutinizing effects of trade integration on entrepreneurial compensation and
endogenous occupational decisions, this model can reproduce the observed pattern of income
changes in the top percentiles. Despite positive joint welfare effects of trade liberalization,
individual gains from trade may be non-monotonic in agents’ skills. While the welfare of workers
and most productive entrepreneurs unambiguously rises, the least- and medium-productive
entrepreneurs may be worse off, if their preferences for the traded goods are small enough.

Length:  25 pages
Creation-Date:  2012-07
File-URL: http://www.bgpe.de/texte/DP/120_Kukharskyy.pdf
File-Format: Application/pdf
File-Function: First version, 2012
Number: 120
Classification-JEL: F12, F16, J24, D31
Keywords: Distributional effects of trade, individual welfare, occupational choice, superstars.
Handle: RePEc:bav:wpaper:120_Kukharskyy