Abstract

Abstract Motivated by recent insights from behavioral economics and social psychology, we present a theory of trade that seeks to explain inter-industry trade between countries that are similar in their production sides, but differ in their income distribution. By assuming status-dependent preferences that are non-homothetic, we show that income inequality differential can be a basis for inter-industry trade between otherwise similar economies.

Highlights

  • Classical and neoclassical trade theory posits dierences in relative factor endowments across countries as the basis for international trade

  • Motivated by recent insights from behavioral economics and social psychology, we present a theory of trade that seeks to explain inter-industry trade between countries that are similar in their production sides, but dier in their income distribution

  • While a few of these studies have considered the role of income distribution in international trade (e.g., Mitra and Trindade, 2005), none have specically explored the link between inequality and trade involving status goods from abehavioral' perspective, as we do

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Summary

Introduction

Classical and neoclassical trade theory posits dierences in relative factor endowments across countries as the basis for international trade (see Jones, 1965). Previous studies that seek to explain trade between countries with similar factor endowments emphasize either on increasing returns to scale and product dierentiation (e.g., Krugman, 1979, and Helpman, 1981) or on technological dierences across countries (e.g., Davis, 1998). These papers assume preferences to be strictly homothetic and focus solely on the production sides of economies. While a few of these studies have considered the role of income distribution in international trade (e.g., Mitra and Trindade, 2005), none have specically explored the link between inequality and trade involving status goods from abehavioral' perspective, as we do.. While a few of these studies have considered the role of income distribution in international trade (e.g., Mitra and Trindade, 2005), none have specically explored the link between inequality and trade involving status goods from abehavioral' perspective, as we do. While there may be disagreement on measurement of inequality in the literature, we use the simplest denition (i.e., the percentage of earned income).

The Model
Autarky Equilibrium
Trading equilibrium and pattern of trade
Conclusion
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