Inequality, Costly Redistribution and Welfare in an Open Economy - - PowerPoint PPT Presentation
A Motivating Example Economic Model Calibration and Counterfactuals Inequality, Costly Redistribution and Welfare in an Open Economy Pol Antr` as Harvard University Alonso de Gortari Harvard University Oleg Itskhoki Princeton University
A Motivating Example Economic Model Calibration and Counterfactuals
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 1 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Trade integration raises real income but often increases inequality
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 2 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Trade integration raises real income but often increases inequality
◮ Standard approach to demonstrating and quantifying the gains from
◮ Kaldor-Hicks compensation principle Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 2 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Trade integration raises real income but often increases inequality
◮ Standard approach to demonstrating and quantifying the gains from
◮ Kaldor-Hicks compensation principle
◮ Two basic shortcomings with this approach:
◮ How much compensation/redistribution actually takes place? ◮ Is this redistribution costless, as the Kaldor-Hicks approach assumes? Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 2 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Trade integration raises real income but often increases inequality
◮ Standard approach to demonstrating and quantifying the gains from
◮ Kaldor-Hicks compensation principle
◮ Two basic shortcomings with this approach:
◮ How much compensation/redistribution actually takes place? ◮ Is this redistribution costless, as the Kaldor-Hicks approach assumes?
◮ These issues are relevant not just for trade, but also for any policy
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 2 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 3 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 3 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ We study welfare implications of trade liberalization in a model in
◮ ... and in which redistribution policies are constrained by information
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 4 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ We study welfare implications of trade liberalization in a model in
◮ ... and in which redistribution policies are constrained by information
◮ Despite the fact that the tax system is progressive, trade increases
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 4 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ We study welfare implications of trade liberalization in a model in
◮ ... and in which redistribution policies are constrained by information
◮ Despite the fact that the tax system is progressive, trade increases
◮ We propose two types of adjustments to standard welfare measures:
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 4 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ We study welfare implications of trade liberalization in a model in
◮ ... and in which redistribution policies are constrained by information
◮ Despite the fact that the tax system is progressive, trade increases
◮ We propose two types of adjustments to standard welfare measures:
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 4 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Skeleton of Trade Model: Itskhoki (2008)
◮ Melitz (2003) with heterogeneous workers/entrepeneurs and a labor
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 5 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Skeleton of Trade Model: Itskhoki (2008)
◮ Melitz (2003) with heterogeneous workers/entrepeneurs and a labor
◮ Costly Redistribution: Nonlinear progressive tax system
◮ After-tax income is log-linear function of pre-tax income (great fit) Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 5 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Skeleton of Trade Model: Itskhoki (2008)
◮ Melitz (2003) with heterogeneous workers/entrepeneurs and a labor
◮ Costly Redistribution: Nonlinear progressive tax system
◮ After-tax income is log-linear function of pre-tax income (great fit)
◮ Welfarist correction: constant degree of inequality- (or risk-) aversion
◮ widely used in Public Finance (veil of ignorance rationale) Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 5 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Skeleton of Trade Model: Itskhoki (2008)
◮ Melitz (2003) with heterogeneous workers/entrepeneurs and a labor
◮ Costly Redistribution: Nonlinear progressive tax system
◮ After-tax income is log-linear function of pre-tax income (great fit)
◮ Welfarist correction: constant degree of inequality- (or risk-) aversion
◮ widely used in Public Finance (veil of ignorance rationale)
◮ Model calibrated to fit 2007 U.S. data:
◮ distribution of skills calibrated to match U.S. distribution of
◮ trade costs calibrated to match U.S. trade share Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 5 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60 7% 8% 9% 10% 11% 12% 13% 14%
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Trade Share Gini of Market Income
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 6 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
◮ Trade models with heterogeneous workers: Itskhoki (2008) but also
◮ matching/sorting models (see Grossman, and Costinot and Vogel for
◮ models with imperfect labor markets (Helpman, Itskhoki, Redding...,
◮ Gains from trade and costly redistribution: Dixit and Norman
◮ Old literature on Kaldor-Hicks: Kaldor (1939), Hicks (1939),
◮ Welfarist approach: Bergson (1938), Samuelson (1947), Diamond &
◮ Costly-redistribution: Kaplow (2008), Hendren (2014)
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 7 / 39
A Motivating Example Economic Model Calibration and Counterfactuals
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 8 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Consider a society composed of a measure one of individuals indexed
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 9 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Consider a society composed of a measure one of individuals indexed
◮ Agents’ preferences v defined over (real) disposable income
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 9 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Consider a society composed of a measure one of individuals indexed
◮ Agents’ preferences v defined over (real) disposable income
◮ The cumulative distribution of ϕ in the population is H (ϕ), while
◮ Society is evaluating the consequences of a trade liberalization that
◮ What are the welfare consequences of the move from F0 (r) to
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 9 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose only lump-sum transfers are used and government budget is
◮ The compensating variation for individual of type ϕ associated with
1 (ϕ) + CV (ϕ)
0 (ϕ)
as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 10 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose only lump-sum transfers are used and government budget is
◮ The compensating variation for individual of type ϕ associated with
1 (ϕ) + CV (ϕ)
0 (ϕ)
1 (ϕ) dH (ϕ) −
0 (ϕ) dH (ϕ)
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 10 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose only lump-sum transfers are used and government budget is
◮ The compensating variation for individual of type ϕ associated with
1 (ϕ) + CV (ϕ)
0 (ϕ)
1 (ϕ) dH (ϕ) −
0 (ϕ) dH (ϕ)
◮ Gains from trade = Aggregate Real Income Growth
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 10 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Principle does not rely on interpersonal comparisons of utility
◮ indirect utility can be heterogeneous across agents ◮ result relies on ordinal rather than cardinal preferences ◮ notion of efficiency argued to be free of value judgments Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 11 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Principle does not rely on interpersonal comparisons of utility
◮ indirect utility can be heterogeneous across agents ◮ result relies on ordinal rather than cardinal preferences ◮ notion of efficiency argued to be free of value judgments
◮ What if redistribution does not take place and the losers are not
◮ under the veil of ignorance, agents see a probability distribution over
◮ risk aversion ≈ inequality aversion Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 11 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Principle does not rely on interpersonal comparisons of utility
◮ indirect utility can be heterogeneous across agents ◮ result relies on ordinal rather than cardinal preferences ◮ notion of efficiency argued to be free of value judgments
◮ What if redistribution does not take place and the losers are not
◮ under the veil of ignorance, agents see a probability distribution over
◮ risk aversion ≈ inequality aversion
◮ Even if some redistribution takes place, whenever it is costly,
◮ Dixit and Norman (1986) showed that W1/W0 > 1 using a coarse set
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 11 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Consider an original position in which individuals evaluate policies
◮ Ex-ante symmetry implies that individual/social welfare is
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 12 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Consider an original position in which individuals evaluate policies
◮ Ex-ante symmetry implies that individual/social welfare is
◮ Suppose preferences feature constant degree of inequality aversion
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 12 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Consider an original position in which individuals evaluate policies
◮ Ex-ante symmetry implies that individual/social welfare is
◮ Suppose preferences feature constant degree of inequality aversion
◮ With simple transformation, we have
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 12 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose H (ϕ) is such that the distribution of disposable income is
1−G(1−2ρ)
1+G
2
◮ W increases in mean income R but decreases in inequality G
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 13 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose H (ϕ) is such that the distribution of disposable income is
1−G(1−2ρ)
1+G
2
◮ W increases in mean income R but decreases in inequality G ◮ Notice that in both cases
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 13 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose now that lump-sum transfers are not feasible and
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 14 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose now that lump-sum transfers are not feasible and
◮ Focus on the particular case (as in Heathcoate et al., 2014) in which
◮ Average net-of-tax rates decrease in reported income at a constant
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 14 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ Suppose now that lump-sum transfers are not feasible and
◮ Focus on the particular case (as in Heathcoate et al., 2014) in which
◮ Average net-of-tax rates decrease in reported income at a constant
◮ Behavioral response to taxation: positive, constant elasticity of
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 14 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ In such a case, we find that aggregate income can be written as
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 15 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ In such a case, we find that aggregate income can be written as
◮ By H¨
◮ Θ is reduced by mean preserving multiplicative spreads of the income
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 15 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Kaldor-Hicks Principle Welfarist Correction Costly Redistribution Correction
◮ In such a case, we find that aggregate income can be written as
◮ By H¨
◮ Θ is reduced by mean preserving multiplicative spreads of the income
◮ Two parametric examples
(1−φ)(1+G)−2G
(1−φ)(1+G)−2G
(1−φ)2
2
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 15 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Unit measure of heterogeneous households with ability ϕ ∼ H(ϕ) ◮ Each household provides its own differentiated good or task (CES) ◮ Linear production technology y = ϕℓ
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 16 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Unit measure of heterogeneous households with ability ϕ ∼ H(ϕ) ◮ Each household provides its own differentiated good or task (CES) ◮ Linear production technology y = ϕℓ ◮ Real market revenue of household ϕ is
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 16 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Unit measure of heterogeneous households with ability ϕ ∼ H(ϕ) ◮ Each household provides its own differentiated good or task (CES) ◮ Linear production technology y = ϕℓ ◮ Real market revenue of household ϕ is
◮ Households have utility over consumption and labor:
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 16 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Unit measure of heterogeneous households with ability ϕ ∼ H(ϕ) ◮ Each household provides its own differentiated good or task (CES) ◮ Linear production technology y = ϕℓ ◮ Real market revenue of household ϕ is
◮ Households have utility over consumption and labor:
◮ Consumption equals after-tax income:
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 16 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Distribution of disposable income (and utility) is shaped by
β(1+ε)(1−φ) 1+εφ
◮ Higher after-tax income inequality when
◮ income is more elastic to taxes (higher ε) ◮ taxes are less progressive (higher φ) ◮ tasks are more substitutable (higher β) Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 17 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ With a constant degree of inequality aversion ρ, we can write
◮ ∆ is the same welfarist correction as in our example ◮ ˆ
◮
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 18 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
1980 1985 1990 1995 2000 2005 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5
Real Adjusted Gross Income in the United States (1979-2007)
Mean Income Median Income 10th Percentile Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 19 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Use U.S. Individual Income Tax Public Use Sample to calibrate
◮ approximately 3.5 million anonymized tax returns ◮ use NBER weights to ensure this is a representative sample ◮ we map market income to adjusted gross income in line 37 of IRS
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 20 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Use U.S. Individual Income Tax Public Use Sample to calibrate
◮ approximately 3.5 million anonymized tax returns ◮ use NBER weights to ensure this is a representative sample ◮ we map market income to adjusted gross income in line 37 of IRS
◮ Use CBO data on before-tax and after-tax/transfer income to
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 20 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Use U.S. Individual Income Tax Public Use Sample to calibrate
◮ approximately 3.5 million anonymized tax returns ◮ use NBER weights to ensure this is a representative sample ◮ we map market income to adjusted gross income in line 37 of IRS
◮ Use CBO data on before-tax and after-tax/transfer income to
◮ Elasticity of substitution = 4 (β = 3/4)
◮ BEJK (2003), Broda and Weinstein (2006)
◮ Experiment with various values of ε and ρ
◮ Benchmark ε = 0.5 and ρ = 1 Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 20 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Lognormal provides a reasonably good approximation, but it does a
r
6 8 10 12 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Income Distribution CDF
Data (Non-Parametric Fit) Lognormal Fit
r
#105 1 2 3 4 5 1 1.5 2 2.5
Empirical Pareto Coefficient
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 21 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Equation (4) may seem ad hoc, but it fits U.S. data remarkably well
y = 0.818x + 2.002 R² = 0.988 9 10 11 12 13 14 9 10 11 12 13 14 Log Income After Taxes and Transfers Log Market Income
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 22 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
.1 .2 .3 .4 1979 1983 1987 1991 1995 1999 2003 2007 Year
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 23 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
": Inequality Aversion 0.55 0.6 0.65 0.7 0.75 0.8 (1+0?)#5: Costly Redistribution 0.85 0.86 0.87 0.88 0.89 0.9 0.91 0.92 0.93 (",(1+0?)# 5) Phase Diagram, ;=1, 0=0.5 Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 24 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Mean real income grew 44.2% over 1979-2007, or 1.32% per year. ◮ For the logarithmic case (ρ = 1), the implied annual growth rate in
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 25 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Mean real income grew 44.2% over 1979-2007, or 1.32% per year. ◮ For the logarithmic case (ρ = 1), the implied annual growth rate in
◮ partly due to observed decline in progressivity
◮ By how much would real income and social welfare have increased if
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 25 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Mean real income grew 44.2% over 1979-2007, or 1.32% per year. ◮ For the logarithmic case (ρ = 1), the implied annual growth rate in
◮ partly due to observed decline in progressivity
◮ By how much would real income and social welfare have increased if
◮ real disposable income would have instead grown by 0.89% per year ◮ social welfare by 0.49% per year Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 25 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Mean real income grew 44.2% over 1979-2007, or 1.32% per year. ◮ For the logarithmic case (ρ = 1), the implied annual growth rate in
◮ partly due to observed decline in progressivity
◮ By how much would real income and social welfare have increased if
◮ real disposable income would have instead grown by 0.89% per year ◮ social welfare by 0.49% per year
◮ By how much would real income and social welfare have increased if
◮ real disposable income would have instead grown by 0.35% per year ◮ social welfare by 0.48% per year Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 25 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Consider a world economy with N + 1 symmetric countries ◮ Agents can market their output locally or in any of the other N
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 26 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Consider a world economy with N + 1 symmetric countries ◮ Agents can market their output locally or in any of the other N
◮ Trade/Offshoring involves two types of additional costs
◮ helps smooth effect of trade integration on the income distribution Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 26 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Consider a world economy with N + 1 symmetric countries ◮ Agents can market their output locally or in any of the other N
◮ Trade/Offshoring involves two types of additional costs
◮ helps smooth effect of trade integration on the income distribution
◮ Sale revenue is now
n(ϕ)Q1−βy(ϕ)β,
β 1−β
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 26 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Assume again that the government only observes market revenue of
◮ government does not observe exporting decisions and f (n (ϕ)) is not
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 27 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Assume again that the government only observes market revenue of
◮ government does not observe exporting decisions and f (n (ϕ)) is not
◮ Disposable income or consumption is thus
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 27 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Assume again that the government only observes market revenue of
◮ government does not observe exporting decisions and f (n (ϕ)) is not
◮ Disposable income or consumption is thus
◮ Agents now choose labor input ℓ(ϕ) and market access investment
◮ Given symmetry, goods market clearing imposes
n(ϕ)y(ϕ)β
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 27 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Result: Trade increases inequality of revenues and utilities
β(1+ε)(1−φ) 1+εφ
(1−β)(1+ε)(1−φ) 1+εφ
1
β(1+ε)(1−φ) 1+εφ
(1−β)(1+ε)(1−φ) 1+εφ
N
β(1+ε)(1−φ) 1+εφ
β 1−β
◮ Two limiting cases:
◮ no agent exports (ϕx1 → ∞) ◮ all agents export (ϕxN → ϕmin)
β(1+ε)(1−φ) 1+εφ Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 28 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
◮ Trade increases relative sale revenue of high-ability households but
Productivity
100 200 300 400 500 600 700 800 900 1000
Relative Revenues, r/R
1 2 3 4 5 6
Autarky Open Economy Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 29 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Closed Economy Open Economy Trade and Inequality
Variable Trade Cost =
1 1.5 2 2.5 1 1.02 1.04 1.06 1.08 1.1 1.12
Gini Ratio, N=10 Variable Trade Cost =
1 1.5 2 2.5 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Variance(R/mean(R)) Ratio, N=10
Variable Trade Cost =
1 1.5 2 2.5 1 1.005 1.01 1.015 1.02 1.025 1.03 1.035
Gini Ratio, N=1
Pre-Tax Post-Tax
Variable Trade Cost =
1 1.5 2 2.5 1.01 1.02 1.03 1.04 1.05 1.06 1.07
Variance(R/mean(R)) Ratio, N=1
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 30 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ We first calibrate the model to 2007 U.S. data (trade share, income
◮ We then explore the implication of a move to autarky on
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 31 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ We first calibrate the model to 2007 U.S. data (trade share, income
◮ We then explore the implication of a move to autarky on
◮ We use the model to gauge the quantitative importance of the two
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 31 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ We first calibrate the model to 2007 U.S. data (trade share, income
◮ We then explore the implication of a move to autarky on
◮ We use the model to gauge the quantitative importance of the two
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 31 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Hold the following parameters fixed
◮ Melitz and Redding (2014), Anderson and Van Wincoop (2004)
◮ U.S. roughly 10-15% of world GDP; results not too sensitive to N
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 32 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Hold the following parameters fixed
◮ Melitz and Redding (2014), Anderson and Van Wincoop (2004)
◮ U.S. roughly 10-15% of world GDP; results not too sensitive to N
◮ Set baseline fixed cost fx to match a U.S. trade share of 0.14 ◮ Set convexity of fixed costs to either α = 1 or α = 3 (consistent
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 32 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Note from (4) that ln r d = ln k + (1 − φ) ln r (ϕ) =
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 33 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Calibrated welfare gains from trade are higher, the higher is the
◮ But relative to autarky trade induces more inequality when ε is high
Labor supply elasticity
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 34 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Welfarist correction is higher, the higher is risk/inequality aversion ρ
◮ With log utility (ρ = 1) and a labor supply elasticity of ε = 0.5,
0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.1 0.25 0.5 0.75 1 2 Degree of Risk/Inequality Aversion ()
Welfarist Adjustment ()
0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00
0.1 0.25 0.5 0.75 1 2 Degree of Risk/Inequality Aversion ()
Welfarist Adjustment (=3)
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 35 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Costly redistribution correction is higher, the higher is the labor
◮ When ε = 0.5, welfare gains are 21% lower for α = 1 and 16% lower
0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 Elasticity of Labor Supply
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 36 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Lognormal underpredicts costly redistribution correction, especially
0.65 0.7 0.75 0.8 0.85 0.9 0.95 1 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 37 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ The observed degree of progressivity in 2007 is optimal if ρ is around
0.2 0.4 0.6 0.8 1
0.05 0.1 0.15 0.2 0.25
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 38 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Trade-induced inequality is partly mitigated via a progressive income
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 39 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Trade-induced inequality is partly mitigated via a progressive income
◮ Still, compensation is not full so trade induces an increase in the
◮ Is it so clear that the Kaldor-Hicks principle is free of value
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 39 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Trade-induced inequality is partly mitigated via a progressive income
◮ Still, compensation is not full so trade induces an increase in the
◮ Is it so clear that the Kaldor-Hicks principle is free of value
◮ Income taxation induces behavioral responses that affect the
◮ Shouldn’t the Kaldor-Hicks principle adjust for this “leaky bucket”
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 39 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Trade-induced inequality is partly mitigated via a progressive income
◮ Still, compensation is not full so trade induces an increase in the
◮ Is it so clear that the Kaldor-Hicks principle is free of value
◮ Income taxation induces behavioral responses that affect the
◮ Shouldn’t the Kaldor-Hicks principle adjust for this “leaky bucket”
◮ In this paper, we have developed welfarist and costly redistribution
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 39 / 39
A Motivating Example Economic Model Calibration and Counterfactuals Calibration Calibrated Welfarist Correction Calibrated Costly Redistribution Correction
◮ Trade-induced inequality is partly mitigated via a progressive income
◮ Still, compensation is not full so trade induces an increase in the
◮ Is it so clear that the Kaldor-Hicks principle is free of value
◮ Income taxation induces behavioral responses that affect the
◮ Shouldn’t the Kaldor-Hicks principle adjust for this “leaky bucket”
◮ In this paper, we have developed welfarist and costly redistribution
◮ Under plausible parameter values, these corrections are nonneglible
Antr` as, de Gortari and Itskhoki Inequality, Costly Redistribution and Welfare in an Open Economy 39 / 39