DP4624 Household Inequality, Welfare and the Setting of Trade Policy

Author(s): Joseph Francois, Hugo Rojas-Romagosa
Publication Date: September 2004
Keyword(s): Atkinson index, Gini index, household distribution of income, political economy, trade policy
JEL(s): D31, D72, F13, O15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4624

We analyse general equilibrium relationships between trade policy and the household distribution of income, decomposing social welfare into real income level and variance components through Gini and Atkinson indexes. We embed these inequality-adjusted social welfare functions in a general equilibrium structure mapping from tariff protection to household inequality. This yields predictions regarding the linkages between trade protection, country characteristics and inequality in Heckscher-Ohlin and Ricardo-Viner frameworks. In addition, we can separate the efficiency and equity effects of tariffs on welfare. We then examine endogenous tariff formation when policy makers care about both equity and special interests.