Wedges: Distribution, distortions, and market integration

Abstract

This paper's model lets an international wedge continuously index a country's capital market integration with the rest of the world, and studies politico-economic determination of a domestic labor wedge that corrects market imperfections and/or redistributes welfare across differently wealthy voters. International integration influences the equilibrium policy, at given country-specific political and structural features, through the strength of factor price effects and through ownership of domestic and foreign capital by the country's citizens. If policy reduces market employment, then it unambiguously does so more strongly when a capital-poor country integrates more tightly with the rest of the world.