| Abstract |
This paper develops a highly tractable model that explores the effect of trade liberalization on international inequalities in wage rates and firm shares as well as in welfare. We embed mobile capital into a two-country trade model with firm heterogeneity and wage rate adjustment. We show that, when trade is liberalized, the international inequality of wage rates is either bell-shaped or monotonically increasing. With firm selection, however, the international inequality of firm shares is always magnified due to a stronger within-industry reallocation effect in favor of exporting firms within the small country. In addition, trade liberalization does not necessarily generate welfare convergence across different countries since the parameters of firm heterogeneity and fixed exporting costs matter. |