Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/242941
Authors: 
Kohl, Miriam
Richter, Philipp M.
Year of Publication: 
2021
Series/Report no.: 
CEPIE Working Paper No. 05/21
Abstract: 
This paper examines the effects of a unilateral reform of the redistribution policy in an economy open to international trade. We set up a general equilibrium trade model with heterogeneous agents allowing for country asymmetries. We show that under international trade compared to autarky, a unilateral tax increase leads to a less pronounced decline in aggregate real income in the reforming country, while income inequality is reduced to a larger extent for sufficiently small initial tax rates. We highlight as a key mechanism a tax-induced reduction in the market size of the reforming country relative to its trading partner, resulting in a firm selection effect towards exporting. From the perspective of a non-reforming trading partner, the unilateral redistribution policy reform resembles a unilateral increase in trade costs leading to a deterioration of terms-of-trade and a decline in both aggregate real income and inequality.
Subjects: 
Income inequality
Redistribution
International trade
Heterogeneous firms
JEL: 
D31
F12
F16
H24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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