Income inequality of destination countries and trade patterns: Evidence from Chinese firm-level data

Miao, Zhuang and Li, Yifan and Duan, Sisong (2020): Income inequality of destination countries and trade patterns: Evidence from Chinese firm-level data.

Abstract

In this paper, we investigate the relation between the export patterns and the income inequality of the destination countries using the Chinese firm-level data. Our empirical analysis finds two main results: (i) export price decreases in the income inequality of the destination countries; while (ii) the exporting firm number and export value will increase in the inequality level. With a conventionally theoretical framework, we discuss the potential influencing mechanism. A higher income inequality leads to higher share of poor consumers in a country, which will lower the quality threshold for Chinese exporters. In this case, the firms with less competitive and producing low quality products are able to enter this market. As a result, we observe that in response to a higher income inequality, more firms enter the market while the exporting price decreases in this market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Income Inequality; Trade Patterns; Chinese Firm-level Data
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms

References

Bastos, P. and J. Silva (2010). The quality of a fi�rm's exports: Where you export to matters. Journal of International Economics 82 (2), 99-111.

Bekkers, E., J. Francois, and M. Manchin (2012). Import prices, income, and inequality. European Economic Review 56 (4), 848-869.

Benassi, C., A. Chirco, and C. Colombo (2006). Vertical differentiation and the distribution of income. Bulletin of Economic Research 58 (4), 345-367.

Choi, Y. C., D. Hummels, and C. Xiang (2009). Explaining import quality: The role of the income distribution. Journal of International Economics 77 (2), 265-275.

Ciani, A. (2017). Income inequality and the quality of imports.

Comite, F. D., J.-F. Thisse, and H. Vandenbussche (2014). Verti-zontal differentiation in export markets. Journal of International Economics 93 (1), 50-66.

Fajgelbaum, P., G. M. Grossman, and E. Helpman (2011). Income distribution, product quality, and international trade. Journal of Political Economy 119 (4), 721-765.

Flach, L. and E. Janeba (2017). Income inequality and export prices across countries. Canadian Journal of Economics 50 (1), 162-200.

Flam, H. and E. Helpman (1987). Vertical product differentiation and north-south trade. The American Economic Review 77 (5), 810-822.

Frankel, D. M. and E. D. Gould (2001). The retail price of inequality. Journal of Urban Economics 49 (2), 219-239.

Gabszewicz, J. J. and J.-F. Thisse (1979). Price competition, quality and income disparities. Journal of Economic Theory 20 (3), 340-359.

Garcia-Marin, A. (2014). Income distribution, quality sorting and trade.

Hallak, J. C. (2006). Product quality and the direction of trade. Journal of International Economics 68 (1), 238-265.

Jaimovich, E. and V. Merella (2012). Quality ladders in a Ricardian model of trade with nonhomothetic preferences. Journal of the European Economic Association 10 (4), 908-937.

Jappelli, T. and L. Pistaferri (2010). Does consumption inequality track income inequality in italy? Review of Economic Dynamics 13 (1), 133-153.

Krueger, D. and F. Perri (2006). Does income inequality lead to consumption inequality? evidence and theory. Review of Economic Studies 73 (1), 163-193.

Latzer, H. and F. Mayneris (2012). Income distribution and vertical comparative advantage. theory and evidence.

Limao, N. and A. Panagariya (2007). Inequality and endogenous trade policy outcomes. Journal of International Economics 72 (2), 292-309.

Ma, Y. and F. Dei (2009). Product quality, wage inequality, and trade liberalization. Review of International Economics 17 (2), 244-260.

Markusen, J. R. (2013). Putting per-capita income back into trade theory. Journal of International Economics 90 (2), 255-265.

Mitra, D. and V. Trindade (2005). Inequality and trade. Canadian Journal of Economics 38 (4),1253-1271.

Simonovska, I. (2015). Income differences and prices of tradables: Insights from an online retailer. The Review of Economic Studies 82 (4), 1612-1656.

Somekh, B. (2012). The effect of income inequality on price dispersion.

Thursby, J. G. and M. C. Thursby (1987). Bilateral trade ows, the linder hypothesis, and exchange risk. The Review of Economics and Statistics 69 (3), 488-495.

Yurko, A. V. (2011). How does income inequality affect market outcomes in vertically differentiated markets? International Journal of Industrial Organization 29 (4), 493-503.