Trade and the distribution of economic well-being in an economy with local public goods

Abstract

This paper models a small open economy containing many identical communities and two types of workers, who are perfectly mobile across communities, but not internationally. Competitive firms produce two tradable private goods, and local governments provide residents with a single public good. Trade patterns differ across communities in equilibrium. This observation is used to prove a modified version of the Stolper–Samuelson theorem. Simply stated, workers who are relatively concentrated in those communities that export a given good gain from a rise in the relative price of this good, whereas the other workers lose.