GEP 14/04: The Impact of Financial Constraints and Wealth Inequality on International Trade Flows, Capital Movements and Entrepreneurial Migration

Summary

We introduce financial frictions into a small two-sector open economy and examine how variations in the wealth distribution affect the movement of goods, capital and entrepreneurs across international borders.

Abstract

We introduce financial frictions into a simple two sector model of international trade with heterogeneous agents and investigate the impact of differences in the strength of financial institutions and wealth inequality on trade flows, capital movements and entrepreneurial migration. Distinct cost-cutting and career-changing motives for entrepreneurial migration exist, which can lead to two-way entrepreneurial flows. We establish presumptions that countries with stronger financial systems or greater wealth inequality will export the output of the financially dependent sector, will import capital and will be a (net) exporter of entrepreneurs. Important exceptions are shown.

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Authors

Spiros Bougheas and Rod Falvey

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