Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/225274
Authors: 
Stark, Oded
Kosiorowski, Grzegorz
Year of Publication: 
2020
Series/Report no.: 
University of Tübingen Working Papers in Business and Economics 138
Abstract: 
Acknowledging that individuals dislike having low relative income renders trade less attractive when seen as a technology that integrates two economies by merging separate social spheres into one. We define a 'trembling trade' as a situation in which gains from trade are less than losses in relative income, with the result that global social welfare is reduced. We show that a 'trembling trade' can arise even when trade is more gainful in four ways: through trade the absolute income of everyone increases, the income gap in both economies is reduced, as is the income gap between the trading economies. However, trade brings populations, economies, or markets that were not previously connected closer together in social space. As a consequence, separate social spheres merge, and people's social space and their comparators are altered. Assuming that people like high (absolute) income and dislike low relative income, the aggregate increase in unhappiness caused by the trade-induced escalation in relative deprivation can result in a negative overall impact of trade on (utilitarian-measured) social welfare, if the absolute income gains are not large enough to mitigate the relative income losses.
Subjects: 
gains from trade
Increase of incomes
Decrease of income gaps
Integration
Change of social space
Low relative income
Quadruply gainful trade
"Trembling trade"
Social welfare
JEL: 
D31
D63
F10
F15
R12
Document Type: 
Working Paper

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