The redistribution of trade gains and the equity-efficiency trade-off

Abstract

The contribution of this paper is to derive an optimal redistribution scheme for trade gains in the case of government's objective function that explicitly accounts for equity-efficiency trade-off. The government pays unemplyment benefits (UB) either financed by a wage tax, a payroll tax or a profit tax paid by exporters only. Using a melitz-type framework with unionized labor markets and heterogeneous workers we show that there is a clear-cut ranking of the redistribution schemes in terms of welfare leve: 1. UB financed by a profit tax paid by exporters 2. UB financed by a wage tax, 3. UB financed by a payroll tax.