Urban development, excessive entry of firms and wage inequality in developing countries

Abstract

This paper examines the short and long‐term effects of urbanisation, via favourable urban development policies, on income distribution and social welfare for a developing country, in which the urban manufacturing sector is characterised by imperfect competition and free entry. Urbanisation shifts rural workers to the highly productive urban sector, while causing production in urban firms to expand because of scale economies. However, urbanisation may worsen wage inequality between skilled and unskilled labour in the short term. In the long term, urbanisation can attract new firms to the urban sector and favourable urban development policies may result in excessive entry of firms, which can amplify wage inequality in the economy. This entry‐amplifying effect is confirmed empirically, especially for low and lower‐middle‐income countries. If the entry effect is not considered, the impact of urbanisation on wage inequality could be understated by 13% for low and lower‐middle‐income countries.

Corporate profit tax, firm entry with unemployment, and income inequality

“…where "ˆ" over a variable denotes the percentage change, 𝜀 = −𝑝∕(𝑝 𝑋 𝑋) > 1 is the price elasticity of demand for manufacturing product, 𝑏 = 𝑚∕𝑝 < 1 expresses the ratio of marginal cost to 7 The same setting can be found, for instance, in Chao et al (1993), Ee et al (2018b), Beladi et al (2020), and .…”

“…The existing literatures on the important issue of income and wage inequality within a general equilibrium setting with Cournot competition are mainly concentrated in trade liberalization and factor mobility (Beladi et al., 2019; Chao et al., 2019; Liu et al., 2019), governmental behaviors (Crettez & Fagart, 2009; 2018a Pi & Zhang, 2018a, 2018b; Beladi et al., 2018; Beladi et al., 2020; Pi & Zhang, 2020), environment regulation (Pan & Zhou, 2013; Pi & Zhang, 2017; Ee et al., 2018a; Pi & Shi, 2019; Kuo et al., 2021), financial market or capital market (Chao et al., 1993; Bumann & Lensink, 2016; Blau, 2018; Pi & Fan, 2020, 2022; Yu & Chao, 2021a), nontradable goods and service economy (Oladi & Beladi, 2009; 2021b Yu & Chao, 2021b, 2021c), corporate social responsibility (Ee et al., 2018b; Pi & Zhao, 2020), and corporate governance (Chao & Wang, 2022).…”