On Measuring the Welfare Gains from Trade Under Consumer Heterogeneity

Abstract

I develop a multi-country, multi-industry model of trade that features heterogeneous consumers with non-homothetic preferences. I use the model to quantify the measurement errors in the welfare gains estimates caused by the assumption of a representative consumer (ARC). First, I reduce the world level of all trade costs by 15% and find that ARC overestimates (underestimates) the gains of the poor (rich) by up to 5 (11) percentage points. Second, I eliminate import tariffs around the globe and show that the loss of tariff revenues is not negligible for some consumers and that the measurement errors from ARC are between À15 and 4% points.Surveys frequently point to the enormous heterogeneity in individual attitudes towards free trade policies. While a majority of relatively rich and educated individuals seems to favour lowering barriers to trade, up to 80% of the poor do not feel helped by globalisation and consistently oppose free trade policies.1 What is the reason for this large gap between the poor and the rich in terms of their views on the potential benefits from international trade? Conventional wisdom suggests that the reason for this disparity is broadly related to the Stolper-Samuelson-type effects when people with different skills, abilities or employment statuses experience heterogeneous effects of trade on their earnings.2 I argue, however, that even in the absence of asymmetric wage effects, the welfare gains from trade are highly heterogeneous across consumers due to consumer-specific price effects. For instance, in 2006 in the US, 32% of consumers believed that free trade agreements would lead to a decrease in domestic prices, while 30% believed they would increase them and 23% expected no significant change. This large degree of heterogeneity of opinions suggests that people consume different bundles of goods and that the price effects of trade liberalisation may be asymmetric across those bundles. I develop a general equilibrium model of trade that gets to grips with these two features by combining consumer heterogeneity, nonhomotheticity of preferences and sector-specific trade elasticity parameters. In the

The Taxing Deed of Globalization

“…This pattern is consistent with two strands of existing work, as long as globalization did not shift the income distribution to the left. First, the recent trade literature predicts that lowering cross-border barriers to goods transactions raises the inequality among workers by benefiting highly productive workers relatively more (see Egger and Kreickemeier 2009;Helpman, Itskhoki, and Redding 2010;Nigai 2016). With limited cross-border mobility of labor, the optimal taxation literature suggests that an increase in real income inequality should be counteracted by increasing the taxes on high-income earners and redistributing across percentiles (see Saez 2001).…”

Per capita income and the demand for skills

“…Finally, a growing literature examine the differential effect of trade on the cost of living across workers and households within a country. This channel has been examined, among others, by Fajgelbaum and Kandelwahl (2016), Nigai (2016) and He and Zhang (2017). 10 For most countries, Fajgelbaum and Kandelwahl (2016) estimate that poor households gain relatively more from trade through cost-of-living effects, while Nigai (2016) tends to find the opposite.…”

“…This channel has been examined, among others, by Fajgelbaum and Kandelwahl (2016), Nigai (2016) and He and Zhang (2017). 10 For most countries, Fajgelbaum and Kandelwahl (2016) estimate that poor households gain relatively more from trade through cost-of-living effects, while Nigai (2016) tends to find the opposite. He and Zhang (2017) extend Fajgelbaum and Kandelwahl (2015) to allow for worker sorting across multiple sectors, and show that the effect of trade on the cost of living can be quantitatively larger than the effects on nominal income.…”

Quality Matters: Monopolistic Competition with Heterogeneous Consumers

“…Ни в том, ни в другом случаях специфические особенности рыночного спроса, обусловленные гетерогенностью потребительских предпочтений, до сих пор не принимались во внимание, несмотря на то что на необходимость учесть их указывали довольно давно [Shaked, Sutton, 1990]. Учет подобного рода особенностей, на наш взгляд, должен являться важной составляющей любой модели монополистической конкуренции многопродуктовых фирм, поскольку реальные потребители неоднородны в своих предпочтениях [Auer, 2010;Calvet, Comon, 2003;Christensen, 2014;Di Comite et al, 2014;Nigai, 2016] 2 .…”