Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271823 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10179
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper studies the market and welfare effects of income heterogeneity in monopolistically competitive product markets in the context of nonhomothetic preferences. In a closed economy, where richer individuals' expenditures are less sensitive to price change compared to poorer ones', a mean-preserving contraction of income distribution entices firms to charge higher markups, reduce output, and fosters creation of new varieties. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on the whole population. In an open economy with free trade, lower income inequality in one country creates price divergence between trading countries. Lower inequality not only further decreases trade volumes and values but also creates a general equilibrium effect that may negatively affect poor individuals. Finally, general equilibrium effects are shown to be quantitatively nonnegligible.
Subjects: 
monopolistic competition
nonhomothetic additive preferences
income inequality
pricing-to-markets
welfare
trade
JEL: 
D43
L16
F12
Document Type: 
Working Paper
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