Estimating Disparity in Welfare Gains from Trade between Firm Owners and Workers

This study quantifies the uneven welfare gains from trade between firm owners and workers in a multi-country model of monopolistic competition under a demand system of constant elasticity of substitution (CES). An agent decides to start up her own firm or to be employed as a worker according to her level of innate capability, which determines the productivity of her potential launched firm. Although keeping this model isomorphic to Melitz's (2003) heterogeneous firm model in terms of the aggregate welfare gains from trade, we are able to examine the welfare gains for firm owners and workers, respectively. Theoretically, we find that countries with lower domestic expenditure shares display higher disparities in welfare gains from trade between firm owners and workers. Taking the model to data, we illustrate the application of the methodology by calculating the respective average welfare gains (compared to autarky) of firm owners and of workers for 14 countries, including G7, BRIC, Korea, Singapore, and Taiwan. Among them, Singapore has relatively lower domestic expenditure shares and shows dramatically large disparity in welfare gains between these two occupations. Taking the year of 2006 as an example, the gap in welfare gains in Singapore reaches to 445.03% while the same measure in the United States is only 9.95%