Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 94: Market Potential and Income Inequality

Desirée Nilsson ()
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Desirée Nilsson: JIBS and CESIS

Abstract: This study assumes that non-homothetic preferences determine the flow of international trade. Empirical studies of international trade have commonly only considered demand from a representative consumer. This would not provide a complete picture of the aggregate market demand. Because of the prevalence of non-homothetic preferences in demand, firms that contemplate exports should consider the distribution of income within a country as an attribute of the corresponding market. This study evaluates the effect that income inequality may exert on a firm’s probability of selecting a particular export market. The theoretical framework is supported by discrete choice theory, and the empirical analysis uses export statistics for the OECD countries. The results indicate that uneven income distribution is perceived as an attractive feature of destinations for exports.

Keywords: market potential; income inequality; discrete choice theory

JEL-codes: D31; F10

24 pages, August 8, 2007

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