A General-Equilibrium Model with Vertically Differentiated Industries, Skilled Labour and Trade

Abstract:     
We present a simple general-equilibrium model where one industry is oligopolistic and vertically differentiated. The manufacturing of products of a higher quality requires the employment of a larger amount of skilled labour. Given an underlying skills distribution, the model determines profits, wages and aggregate income and welfare. Results show that increasing skills endowments typically benefits the whole economy due to product quality increases and quality-adjusted price decreases. When trade opening leads to exports of the quality good, aggregate welfare increases but unskilled-wage earners lose. The effects of labour taxation depend crucially on the existence of trade.

Keywords: vertical product differentiation, skills, labour productivity, intra-industry trade

JEL Classification: D4, D5, F1, F2, J2, L1

Accepted Paper Series