On the effects of income heterogeneity in monopolistically competitive markets”

This paper studies the e¤ects of income heterogeneity on monopolistically competitive
product markets and welfare in the context of non-homothetic preferences. When richer
individuals expenditures are less sensitive to price change compared to poorer ones , a
mean-preserving contraction of income distribution entices rms to charge higher prices,
new rms enter and broaden product diversity. General equilibrium e¤ects have a negative
impact on poorer individuals and, in speci c circumstances, on whole population. In
open economies, lower income inequality in a country creates a price divergence between
countries and decreases trade volumes and values. Those general equilibrium e¤ects are
quantitatively non negligible.