Endogenous Ranking and Equilibrium Lorenz Curve
Across (ex-ante) Identical Countries
Abstract
This paper considers a model of the world economy with a finite number of ex-ante identical countries and a continuum of tradeable goods. Productivity differences across countries arise endogenously through free entry to the local differentiated producer service sector in each country. It is shown that, in any stable equilibrium, the countries sort themselves into specializing in different sets of tradeable goods and that a strict ranking of countries in income, TFP, and the capital-labor ratio emerge endogenously. The equilibrium Lorenz curve is characterized by a second-order nonlinear difference equation with the two terminal conditions. As the number of countries increases, this equation converges to a differential equation whose unique solution can be solved analytically and depends on a few parameters in a tractable manner. This enables us to show when the equilibrium distribution obeys a power-law and how various forms of globalization affect inequality among countries and to study the welfare effects of trade.
