On the heterogeneous welfare gains and losses from trade

Abstract

How are the gains and losses from trade (disruptions) distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with nonhomothetic preferences-to generate the documented relationship between tradable expenditure shares, income, and wealth-and uninsurable earnings risk-to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade on households along the income and wealth distribution. In a numerical exercise, we increase trade costs by 20 percentage points and allow the economy to transition to a new steady state. We find that households in the lowest wealth decile experience welfare losses over the transition, measured by permanent consumption equivalents, that are 35 percent larger than those in the highest wealth decile. Finally, we find that the distributional impacts of trade significantly depend on how the tariff revenue is spent. In particular, using tariff revenue to reduce labor income taxes is close to welfare-neutral.

Fiscal policy during a pandemic

“…In the baseline version of the model, borrowers do not consume service goods. I make this modeling decision for several reasons, technical and conceptual: (i) it is documented that lower-income households tend to have a lower fraction of expenditures in services and nontradables (Boppart, 2014;Carroll and Hur, 2020); (ii) even for low values of σ a it is very hard to prevent borrowers from switching expenditure from services to non-services when faced with a utility shock, thus causing a boom in the non-services sector, which is at odds with the data. Nevertheless, I repeat the baseline exercise for a version of the model where both agents consume both goods, setting σ a = 0.25, and show that the results do not change substantially.…”

“…Boppart (2014) andCarroll and Hur (2020) use different approaches and datasets to document that the share of expenditure in services and nontradable goods, respectively, is increasing in income.…”

On the Distributional Effects of International Tariffs

“…Answering this question requires a careful quantitative analysis because tariffs affect households differently along many dimensions. Tariffs raise the prices of tradable goods and services, and poor households spend relatively more on these than the rich, as documented by Cravino and Levchenko (2017) and Carroll and Hur (2020). Tariffs also discourage capital accumulation by increasing the cost of capital production.…”

On the Distributional Effects of International Tariffs

“…Our paper draws from several strands of the literature. We build on the heterogeneous agent trade model developed in Carroll and Hur (2020), which combines Ricardian trade as in Dornbusch et al (1977), Stone-Geary nonhomothetic preferences as in Buera and Kaboski (2009), Herrendorf et al (2013), Uy et al (2013), and Kehoe et al (2018), and incomplete markets as in Aiyagari (1994), Bewley (1986), Huggett (1993), andImrohoroglu (1989), by adding heterogeneous skills, tariffs, distortionary income taxes, and endogenous labor. We also adopt capital-skill complementarities in the spirit of Stokey (1996), Krusell et al (2000), and Parro (2013).…”